978-0133423822 Chapter 20 Part 4

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44) A futures contract is a specialized form of a forward contract distinguished by an

organized exchange which encourages conidence in the futures market by allowing for the

efective regulation of trading.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

45) The margin on a futures contract refers to the amount of equity the investor initially

paid to purchase the futures contract.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

46) An American option can be exercised only on the expiration date.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

47) Open interest provides the investor with some indication of the amount of liquidity

associated with a particular option.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

48) If a call option’s exercise price is above the stock price, then the option’s intrinsic value

is zero.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

49) The most you can ever lose when you purchase a put or call option is the premium.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

50) What are the diferences between forward contracts and futures contracts? What are

some advantages and disadvantages of each.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk-Return Tradeof

51) What are the rights and obligations of the buyer and the seller of a call option on

common stock?

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

52) Jorge has purchased call options on 1000 shares of Amazon stock with a striking price

of $270 per share. The option premium was $4.00 per share.

a. Compute Jorge’s proit or loss if the market value of Amazon’s stock is $280 at

expiration.

b. Compute Jorge’s proit or loss if the market value of Amazon’s stock is $260 at

expiration.

c. Compute Jorge’s proit or loss if the market value of Amazon’s stock is $272 at

expiration.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

53) Annika has purchased put options on 1000 shares of Amazon stock with a striking price

of $270 per share. The option premium was $6.00 per share.

a. Compute Annika’s proit or loss if the market value of Amazon’s stock is $280 at

expiration.

b. Compute Annika’s proit or loss if the market value of Amazon’s stock is $260 at

expiration.

c. Compute Annika’s proit or loss if the market value of Amazon’s stock is $272 at

expiration.

Question Status: Revised

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

20.5 Valuing Options and Swaps

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

4) The greater a irm’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 efect on the stock’s future price

D) The answer depends on the risk-free rate.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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)

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

7) Assume that the current price of DEY stock is $25, that a 1 year 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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

Use the following information to answer the following question(s).

Valuing a call option using the Black-Scholes model:

Current price 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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

9) What is the value of d2 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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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 diferent interest rates.

C) exchange a loan for a diferent loan with a diferent time to maturity.

D) swap a debt obligation for an equity obligation.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

12) A irm agrees to accept payments on a $1,000,000 loan with a ixed interest rate of 8%

in exchange for making the payments on a loan with loating rate payments based on

LIBOR. Payments are interest only with principal due in 10 years. The irm will beneit

A) if LIBOR falls.

B) if LIBOR rises.

C) if Libor remains unchanged.

D) if LIBOR luctuates randomly.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

13) The seller of credit default swaps

A) agrees to exchange payments with another security if interest rates change.

B) receives payments if the underlying security defaults.

C) is obliged to make payments if the underlying security defaults.

D) can only sell them to owners of the underlying security.

Question Status: New question

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

15) Futures and currency swaps eliminate unfavorable price movements, whereas options

can be used to eliminate the efect of both favorable and unfavorable price movements.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

16) As the volatility of a stock’s price increases, the value of call and put options on the

stock decreases.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

17) As the length of time left until expiration increases, the value of call and put options on

the stock also increases.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

18) Currency swaps allow the inancial manager to hedge exchange rate risk over shorter

periods than options and futures contracts.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

19) A swap is generally structured so that no money initially changes hands.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

20) A credit default swap functions like an insurance policy against the possibility of

default on a bond or other security collateralized by debt.

Question Status: New question

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: swap contract

Principles: Principle 2: There Is a Risk-Return Tradeof

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.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

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.

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof

23) What are the major variables in the Black-Scholes option pricing model and in what

direction do they inluence the price of call options?

Question Status: Previous edition

Objective: 20.5 Understand how to value options and how swaps work.

Keywords: Black-Scholes option pricing model

Principles: Principle 2: There Is a Risk-Return Tradeof