Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   Call options generally sell at a price less than their exercise value.
B)   If a stock becomes riskier (more volatile) , call options on the stock are likely to decline in value.
C)   Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
D)   Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E)   If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.F) None of the above
G) A) and C)

Question 2

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Accepted Answer

A) True 
 B)False

Question 4

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False

Question 5

Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?

Accepted Answer

A)   The options with the $25 strike price will sell for less than the options with the $35 strike price.
B)   The options with the $25 strike price have an exercise value greater than $5.
C)   The options with the $35 strike price have an exercise value greater than $0.
D)   If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
E)   The options with the $25 strike price will sell for $5.F) A) and B)
G) All of the above

Question 6

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero.

Accepted Answer

A) True 
 B)False

Question 7

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Accepted Answer

A) True 
 B)False

Question 8

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Accepted Answer

A)   Variability of the stock price.
B)   Option's time to maturity.
C)   Strike price.
D)   All of the above.
E)   None of the above.F) A) and E)
G) B) and C)

Exam 8: Financial Options and Applications in Corporate Finance

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Correct Answer
verified

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct Answer
verified

Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?

Correct Answer
verified

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Correct Answer
verified

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct Answer
verified

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Correct Answer
verified

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Exam 8: Financial Options and Applications in Corporate Finance

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Correct AnswerverifiedShow Answer

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct AnswerverifiedShow Answer

Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?

Correct AnswerverifiedShow Answer

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Correct AnswerverifiedShow Answer

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct AnswerverifiedShow Answer

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Correct AnswerverifiedShow Answer

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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