978-0132757089 Chapter 20 Part 4

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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

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

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

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

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

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

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