Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
53) Annika has purchased put options on 1000 shares of Amazon stock with a striking price of
$170 per share. The option premium was $6.00 per share.
a. Compute Annika's profit or loss if the market value of Amazon's stock is $180 at expiration.
b. Compute Annika's profit or loss if the market value of Amazon's stock is $160 at expiration.
c. Compute Annika's profit or loss if the market value of Amazon's stock is $172 at expiration.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
1) Which of the following variables is NOT part of the Black-Scholes option pricing model?
A) The expected rate of return on the market
B) The current stock price
C) The strike price or exercise price
D) The time remaining before the expiration date
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
2) As the volatility of a stock's price increases, the value of call options ________ and the value
of put options ________.
A) decreases, increases
B) increases, increases
C) decreases, decreases
D) increases, decreases
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
28
3) As the risk free rate of return increases, the value of call options ________ and the value of
put options ________.
A) decreases, increases
B) increases, increases
C) decreases, decreases
D) increases, decreases
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
4) The greater a firm's dividend payout, the ________ likely it is that the stock's price will rise
above the exercise price.
A) less
B) more
C) dividends have no effect on the stock's future price
D) the answer depends on the risk-free rate.
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
5) Assume that the current price of DEY stock is $25, that a 6 month call option on the stock has
a strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as
.5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.
A) $1.74
B) $4.20
C) 1.98
D) $2.50
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
29
6) Assume that the current price of DEY stock is $27.50, that a 6 month call option on the stock
has a strike or exercise price of $25.50, the risk free rate is 4%, and that you have calculated
N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the
option.
A) $1.74
B) $4.20
C) 1.98
D) ($2.50)
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
7) Assume that the current price of DEY stock is $25, that a 1 year call option on the stock has a
5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.
A) $1.74
B) $4.20
C) 1.98
D) $2.50
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
Use the following information to answer the following question(s).
Valuing a call option using the Black Scholes model
Current price of of ABZ stock = $50
Exercise or strike price of the call option = $48
The maturity of the option is 0.5 years
The annualized variance in the returns on the stock is .20
The risk free rate of interest is 3% per annum
8) What is the value of d1 that should be used when calculating the value of a call option on this
stock with the Black- Scholes option pricing model.
A) .33464
B) .07483
C) .40822
D) .01842
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
30
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
10) Assume that N(d1) = .63105 and N(d2) = .50735. Compute the value of the call option using
the Black -Scholes option pricing model.
A) $23.99
B) $7.56
C) $7.20
D) $2.00
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
11) When a party enters into a swap contract it agrees to:
A) accept one set of payments in exchange for another.
B) exchange principals on loans with different interest rates.
C) exchange a loan for a different loan with a different time to maturity.
D) swap a debt obligation for an equity obligation.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
31
12) A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in
exchange for making the payments on a loan with floating rate payments based on LIBOR.
Payments are interest only with principal due in 10 years. The firm will benefit:
A) if LIBOR falls.
B) if LIBOR rises .
C) if Libor remains unchanged.
D) if LiIBOR fluctuates randomly.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
8% in exchange for making the annual payments on a loan with floating rate payments based on
LIBOR. Payments are interest only with principal due in 10 years. If LIBOR falls to 7%, the
firm's net cash flow will be:
A) $70,000.
B) ($10,000).
C) $10,000.
D) $80,000.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
14) Which of the following is a vehicle for controlling exchange rate risk?
A) The purchase of a cross-rate index
B) The purchase of a LEAP
C) The purchase of a spot-rate index
D) A currency swap
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
15) Futures and currency swaps eliminate unfavorable price movements, whereas options can be
used to eliminate the effect of both favorable and unfavorable price movements.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
32
16) As the volatility of a stock's price increases, the value of call and put options on the stock
decreases.
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
17) As the length of time left until expiration increases, the value of call and put options on the
stock also increases.
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
18) Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods
than options and futures contracts.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
19) A swap is generally structured so that no money initially changes hands.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
20) One of the most popular swaps is the interest rate swap.
Topic: 20.5 Valuing Options and Swaps
Keywords: swap contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
21) Assume that the current price of FGX stock is $35, that a 6 month call option on the stock
has a strike or exercise price of $33.00, the risk free rate is 4%, and that you have calculated
N(d1) as .65 and N(d2) as .55. Use the Black-Scholes model to calculate the price of the option.
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
33
22) Assume that the current price of FGX stock is $33, that a 6 month call option on the stock
has a strike or exercise price of $35.00, the risk free rate is 4%, and that you have calculated
N(d1) as .65 and N(d2) as .55. Use the Black-Scholes model to calculate the price of the option.
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
23) What are the major variables in the Black-Scholes option pricing model and in what direction
do they influence the price of call options?
Topic: 20.5 Valuing Options and Swaps
Keywords: Black-Scholes option pricing model
Principles: Principle 2: There Is a Risk-Return Tradeoff
34
