15) For a(n) ________ put option, the longer the time to expiration, the greater the value of
the option, all other things held constant.
A) American
B) European
C) Asian
D) A & B
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
16) For a(n) ________ put option, the higher the stock price, the lower the value of the
option
A) American
B) European
C) Asian
D) A & B
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
17) What efect does volatility of the underlying asset have on the price of the option?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
21.4 The Black-Scholes Option Pricing Formula
1) The Black-Scholes formula gives the price of an American call option.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
29
2) The Black-Scholes formula is notable because it does not require us to know ________.
A) the expected return on a stock
B) the risk-free rate
C) the volatility of the stock
D) the dividend rate on the stock
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Which of the following is not used in the Black-Scholes option pricing formula?
A) stock price
B) dividend yield
C) strike price
D) risk-free rate
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
21.5 Put-Call Parity
1) When you purchase a put option while still holding the underlying stock, it is known as a
________.
A) protective put
B) protective call
C) speculative put
D) speculative call
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
30
2) ________ is the relationship between the value of a stock, bond and the call and put
options on the same stock and the same exercise price.
A) Dividend exclusion
B) Limit law
C) Put-call parity
D) Put option equality
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3) Suppose you are looking to exploit opportunities in the options markets. The price of a
call option on Apple computers with a maturity of one year and strike price $150 is $15,
and the price of the stock is $140. What should the price of a put option be to preclude
proitable opportunities? The risk-free rate of interest is 5%.
A) $21.45
B) $17.86
C) $25.00
D) $19.63
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
4) Consider the following equation:
C = P + S – PV(K) – PV(Div)
In this equation, what does the term S represent?
A) the payof of a zero-coupon bond
B) the strike price of the option
C) the value of the call option
D) the stock’s current price
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
31
5) Consider the following equation:
C = P + S – PV(K) – PV(Div)
In this equation, what does the term C represent?
A) the value of the call option
B) the stock’s current price
C) the payof of a zero-coupon bond
D) the strike price of the option
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
6) Consider the following equation:
C = P + S – PV(K) – PV(Div)
In this equation, what does the term K represent?
A) the value of the call option
B) the strike price of the option
C) the price of a zero-coupon bond
D) the stock’s current price
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
7) Luther Industries is currently trading for $27 per share. The stock pays no dividends. A
one-year European put option on Luther with a strike price of $30 is currently trading for
$2.60. If the risk-free interest rate is 6% per year, then the price of a one-year European
call option on Luther with a strike price of $30 will be closest to ________.
A) $1.30
B) $7.10
C) $2.60
D) $1.95
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8) Rose Industries is currently trading for $47 per share. The stock pays no dividends. A
one-year European call option on Luther with a strike price of $45 is currently trading for
$7.45. If the risk-free interest rate is 6% per year, then calculate the price of a one-year
European put option on Luther with a strike price of $45.
P = $7.45 – $47 + = $2.90
Dif: 2 Var: 1
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
9) A protective put written on a portfolio (rather than a single stock) is known as ________.
A) portfolio insurance
B) put-call parity
C) a warrant
D) Black-Scholes
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
10) According to put-call parity, which of the following would cause the value of a call
option to decrease?
A) a decrease in the present value of future dividends
B) a decrease in the present value of the strike price
C) an increase in the stock price
D) a decrease in the price of the put price
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
33
21.6 Options and Corporate Finance
1) A share of stock can be thought of as a call option on the assets of the irm with a strike
price equal to the face value of debt.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) A share of stock is a ________ option on the assets of the irm with a strike price equal to
________.
A) put option, face value of debt
B) call option, market value of equity
C) call option, face value of debt
D) put option, market value of equity
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Debt holders can be thought of as owning the irm but having ________ a call option on
the assets of the irm with a strike price equal to ________.
A) written, face value of debt
B) bought, face value of debt
C) written, value of equity
D) bought, value of equity
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Equity holders have an incentive to ________ the volatility of a irm’s assets because they
beneit from such an increase at a cost to ________.
A) decrease, debt holders
B) decrease, suppliers
C) increase, directors
D) increase, debt holders
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) A(n) ________ in the volatility of assets of the irm beneits ________ at a cost to debt
holders.
A) decrease, equity holders
B) increase, equity holders
C) decrease, directors
D) increase, directors
34
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Which of the following statements is FALSE?
A) The option price is more sensitive to changes in volatility for at-the-money options than
it is for in-the-money options.
B) A share of stock can be thought of as a put option on the assets of the irm with a strike
price equal to the value of debt outstanding.
C) In the context of corporate inance, equity is at-the-money when a irm is close to
bankruptcy.
D) Because the price of equity is increasing with the volatility of the irm’s assets, equity
holders beneit from a zero-NPV project that increases the volatility of the irm’s assets.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
35