Corporate Finance, 12e (Ross)
1) A financial contract that provides its owner with the right, but not the obligation, to buy or sell
a specified asset at an agreed-upon price on or before a given future date is called a(n) ________
contract.
A) option
B) futures
C) forward
D) swap
E) straddle
2) The act where an owner of an option buys or sells the underlying asset, as is his right, is called
________ the option.
A) striking
B) exercising
C) opening
D) splitting
E) strangling
3) The fixed price in an option contract at which the owner can buy or sell the underlying asset is
called the option’s:
A) opening price.
B) intrinsic value.
C) strike price.
D) market price.
E) time value.
4) The last day on which an owner of an option can elect to exercise that option is referred to as
the ________ date.
A) ex-payment
B) ex-option
C) opening
D) expiration
E) intrinsic
5) An option that may be exercised only on the expiration date is called a(n) ________ option.
A) European
B) American
C) Bermudian
D) futures
E) Asian
6) The difference between an American option and a European option is that the American
option:
A) has a fixed exercise price while the European exercise price can vary within a small range.
B) is a right to buy while a European option is an obligation to buy.
C) has an expiration date while the European option does not.
D) is written on 100 shares of the underlying security while the European option covers 1,000
shares.
E) can be exercised at any time up to the expiration date while the European option can only be
exercised on the expiration date.
7) An option that may be exercised at any time up to and including its expiration date is called
a(n) ________ option.
A) futures
B) Asian
C) Bermudian
D) European
E) American
8) If a call option has a positive intrinsic value at expiration the call is said to be:
A) funded.
B) unfunded.
C) at the money.
D) in the money.
E) out of the money.
9) A ________ is a derivative security that gives the owner the right, but not the obligation, to
buy an asset at a fixed price for a specified period of time.
A) futures contract
B) call option
C) put option
D) swap
E) forward contract
10) If you are the owner of a European call option, you:
A) are obligated to buy the specified assets prior to the option’s expiration.
B) have the right to sell the specified assets at the set price at any time up to and including on the
expiration date.
C) have the right to buy the specified assets at the set price only on the expiration date.
D) are obligated to sell the specified assets at the set price if the option is exercised.
E) have the right to buy the specified assets at the set price at any time prior to the option’s
expiration.
11) Which of these will increase the value of a call option?
I. An increase in the market value of the underlying asset
II. An increase in the option’s strike price
III. A decrease in the market value of the underlying asset
IV. A decrease in the option’s strike price
A) I and II only
B) II only
C) II and III only
D) I and IV only
E) I only
12) An out-of-the-money call option is best defined as an option that:
A) has an exercise price below the current market price of the underlying security.
B) should not be exercised at this time.
C) has an exercise price equal to the current market price of the underlying security.
D) has expired.
E) qualifies as an American option.
13) Jillian owns a call option on WAN stock with a strike price of $20 a share. Currently, WAN
is selling for $24.50 a share. Jillian would like to profit on this option but is not permitted to
exercise the option for another two weeks. She believes the stock will decline in value before the
two weeks is up. What should she do?
A) Sell her option today
B) Place an order to exercise her option on its expiration date
C) Purchase an additional call option on WAN today with a strike price of $20
D) Place an order to exercise her option as soon as she is permitted to do so
E) Convert her American option into a European option
14) The owner of a European put option has the:
A) right, but not the obligation, to sell the underlying asset at the specified price only on the
specified date.
B) right, but not the obligation, to sell the underlying asset at the specified price during a
specified period of time.
C) obligation to sell the underlying asset on the specified date, but only if they can do so at the
specified price.
D) obligation to buy the underlying asset sometime during the specified period at the specified
price.
E) right, but not the obligation, to buy the underlying asset at the exercise price on the expiration
date.
15) An option that grants the right, but not the obligation, to sell shares of the underlying asset
during a particular time period at a specified price is called:
A) either an American or a European option.
B) an American call option.
C) an American put option.
D) a European put option.
E) a European call option.
16) Which one of the following provides the right to sell a stock anytime during the option
period at the strike price even if the market price of the stock declines to zero?
A) American call
B) European call
C) American put
D) European put
E) Should the underlying stock price decline to zero, all options are null and void.
17) Which of these will decrease the value of a put option?
I. An increase in the market value of the underlying asset
II. An increase in the option’s strike price
III. A decrease in the market value of the underlying asset
IV. A decrease in the option’s strike price
A) I and II only
B) I and IV only
C) II and III only
D) III only
E) IV only
18) An in-the-money put option is one that:
A) has an exercise price greater than the underlying stock price.
B) has an exercise price less than the underlying stock price.
C) expires today.
D) should not be exercised at expiration.
E) should not be exercised at any time.
19) On the expiration day, the maximum price of a put option on a stock is the greater of the:
A) stock price minus the exercise price, or 0.
B) the exercise price or 0.
C) exercise price minus the stock price, or 0.
D) stock price or 0.
E) exercise price or the stock price.
20) Jeff owns an American put option on 100 shares of ABC stock. The option has a strike price
of $32.50 and a September expiration date. The stock has recently been declining in value,
currently sells for $27.65 per share, and is expected to continue declining in value. Ignore all
costs and taxes. If today is Wednesday, August 14, he:
A) cannot exercise his option even though he would like to do so.
B) should hold his option until September.
C) can exercise his option and earn a profit.
D) should exercise his option today and then sell the shares of stock on the September expiration
date.
E) should let his option expire unless the stock price increases above $32.50 a share.
21) A put option on ABC stock with an exercise price of $35 expires today. The current price of
ABC stock is $36. The put is:
A) funded.
B) unfunded.
C) at the money.
D) in the money.
E) out of the money.
22) Which one of the following statements concerning call option writers is true?
A) Call option writers promise to purchase shares if the call option is exercised.
B) The call option writer has the option, but not the obligation, to purchase shares if the option is
exercised.
C) The call option writer is betting that the market price of the underlying asset will increase.
D) The call option writer receives a cash payment when the option is written.
E) The call option writer earns a profit when an in-the-money option is exercised.
23) Eric has an option position on Langdon stock that results in a zero dollar payoff when the
stock price is equal to or greater than the option strike price. What did he do to obtain this
position?
A) Purchased a call option
B) Purchased a put option
C) Wrote a call option
D) Wrote a put option
E) No option position would have this result.
24) Assume you are reviewing a table that lists the current stock option contracts and quotes.
Which one of these statements would correctly apply to that table?
A) If you write a contract you will pay the bid price per share listed in the table.
B) If you write a contract you will receive the difference between the bid and ask prices per
share.
C) The bid price on a specific contract will be higher than the ask price on that same contract.
D) To purchase one contract you must pay 1000 times the quoted bid price shown in the table.
E) To purchase one contract you must pay 100 times the quoted ask price shown in the table.
25) Assume you are reviewing a table that lists the current stock option contracts and quotes. On
a specific contract the table shows an option interest value of 38 and volume of 9. This means
that:
A) 9 contracts were exercised on that day while 38 more were traded.
B) 38 contracts were traded on that day compared to only 9 traded on the previous day.
C) 9 contracts were traded on that day at a price of $.38 per share.
D) 38 contracts were traded on that day at the bid price and 9 were traded at the ask price.
E) 9 of the 38 outstanding contracts traded on that day.
26) The relationship between the prices of the underlying stock, a call option, a put option, and a
riskless asset is referred to as the ________ relationship.
A) put-call parity
B) covered call
C) protective put
D) straddle
E) strangle
27) Given an exercise price, time to maturity, and European put-call parity, the present value of
the strike price plus the price of the call option is equal to the:
A) current market value of the stock.
B) present value of the stock minus the price of a put option.
C) price of a put option minus the market value of one share of stock.
D) value of a risk-free U.S. Treasury bill.
E) price of the stock plus the price of the put option.
28) Selling a covered call is equivalent to:
A) buying a zero coupon bond and selling a put.
B) selling a put and buying an offsetting call.
C) buying the stock and selling the call.
D) selling a zero coupon bond and buying a put.
E) buying a zero coupon bond and buying a call.
29) You can realize the same value as that derived from stock ownership if you:
A) sell a put option and invest at the risk-free rate of return.
B) buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.
C) sell a put, buy a call, and buy a zero-coupon bond.
D) lend out funds at the risk-free rate of return and sell a put option on the stock.
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of
put and call options.
30) Put-call parity can be used to show:
A) how far in-the-money put options can be.
B) how far in-the-money call options can be.
C) the precise relationship between put and call prices given equal exercise prices and equal
expiration dates.
D) that the value of a call option is always twice that of a put given equal exercise prices and
equal expiration dates.
E) that the value of a call option is always half that of a put given equal exercise prices and equal
expiration dates.
31) Which combination is referred to as a protective put? Assume all sales and purchases refer to
ABC stock and its option contract.
A) Buying 100 shares of stock and writing one put option contract
B) Selling a put option contract and buying an offsetting call option contract
C) Buying 300 shares of stock and selling three call option contracts
D) Buying a put option contract and buying 100 shares of stock
E) Buying a put option contract and selling a call option contract with the same strike price and
expiration date
32) Assume you purchase one share of a stock and sell a call option on a single share of that
same stock with an exercise price of $25. What is the maximum payoff you can realize on this
combination?
A) The exercise price of $25
B) An amount equal to the stock price on the option expiration date
C) An amount equal to $25 minus the stock price on the option expiration date
D) An amount equal to the stock price on the expiration date plus $25
E) Zero
33) Hi-Tech announces a major expansion which causes the price of its stock to increase and also
causes an increase in the volatility of the stock price. How will these two reactions affect the
value of call options on this stock?
A) Both reactions will decrease the value.
B) Both reactions increase the value.
C) Neither reaction will affect the value.
D) The reactions will have offsetting effects on the value.
E) The change in volatility will have no effect while the increased stock price will increase the
value.
34) New Tek announces a major expansion which causes the price of its stock to increase and
also causes an increase in the volatility of the stock price. How will these two reactions affect the
value of put options on this stock?
A) Both reactions will decrease the value.
B) Both reactions will increase the value.
C) Neither reaction will affect put option values.
D) The reactions will have offsetting effects on the value.
E) The change in volatility will have no effect while the increased stock price will decrease the
value.
35) A trading opportunity that offers a riskless profit is called a(n):
A) put option.
B) call option.
C) market equilibrium.
D) arbitrage.
E) cross-hedge.
36) The value of an option if it were to immediately expire, that is, its lower pricing bound, is
called an option’s ________ value.
A) strike
B) market
C) volatility
D) time
E) intrinsic
37) The maximum value of a call option is equal to the:
A) strike price minus the initial cost of the option.
B) exercise price plus the price of the underlying stock.
C) strike price.
D) price of the underlying stock.
E) purchase price.
38) The lower bound on a call’s value is defined as the:
A) greater of the strike price or zero.
B) greater of the stock price minus the exercise price or zero.
C) lesser of the strike price or the stock price.
D) lesser of the strike price or zero.
E) lesser of the stock price minus the exercise price or zero.
39) The lower bound of a call option’s value:
A) can be a negative value regardless of the stock or exercise prices.
B) can be a negative value but only when the exercise price exceeds the stock price.
C) can be a negative value but only when the stock price exceeds the exercise price.
D) must be greater than zero.
E) can be equal to zero.
40) The intrinsic value of a call equals the:
A) exercise price minus the stock price.
B) upper bound of the call’s value.
C) market price of the call option.
D) lower bound of the call’s value.
E) premium paid to purchase the call.
41) The intrinsic value of a put is equal to the:
A) lesser of the strike price or the stock price.
B) lesser of the stock price minus the exercise price or zero.
C) lesser of the stock price or zero.
D) greater of the strike price minus the stock price or zero.
E) greater of the stock price minus the exercise price or zero.
42) Which one of the following statements is correct concerning in-the-money option values?
A) The value of a put decreases as the exercise price increases.
B) The value of a put increases as the price of the underlying stock increases.
C) The value of a call decreases as the exercise price increases.
D) An increase in the underlying stock price decreases both the value of a put and a call.
E) The value of a call decreases as the price of the underlying stock increases.
43) All else held constant, the value of a call decreases when the:
A) time to expiration increases.
B) risk-free rate of return increases.
C) stock price increases.
D) exercise price increases.
E) volatility of the price of the underlying stock increases.
44) Which one of the following will cause the value of a call to decrease?
A) Lowering the exercise price
B) Increasing the time to expiration
C) Increasing the risk-free rate
D) Lowering the risk level of the underlying security
E) Increasing the stock price
45) Assume you own both a May 40 put and a May 40 call on ABC stock. Which one of the
following statements is correct concerning your option positions? Ignore taxes and transaction
costs.
A) An increase in the stock price will increase the value of your put and decrease the value of
your call.
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C) The time premiums on both your put and call are less than the time premiums on equivalent
June options.
D) A decrease in the stock price will decrease the value of both of your options.
E) You can never profit on your positions as your profits on one option will be offset by losses
on the other option.
46) You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put
will:
A) also finish in the money.
B) finish at the money.
C) finish out of the money.
D) either finish at the money or in the money.
E) either finish at the money or out of the money.