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47) An increase in which one of the following will decrease the value of a call option?
A) Interest rate
B) Exercise price
C) Time to expiration
D) Stock volatility
E) Underlying asset price
48) The effect on an option's value of a small change in the value of the underlying asset is called
the option:
A) theta.
B) vega.
C) rho.
D) delta.
E) gamma.
49) In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized,
normally distributed random variable is:
A) less than or equal to N(d2).
B) less than one.
C) equal to one.
D) equal to d1.
E) less than or equal to d1.
50) The Black-Scholes option pricing model is dependent on which five parameters?
A) Stock price, exercise price, risk-free rate, probability of occurrence, and time to expiration
B) Stock price, risk-free rate, probability of occurrence, time to maturity, and variance of the
underlying asset
C) Stock price, risk-free rate, probability of occurrence, variance of the underlying asset, and
exercise price
D) Stock price, exercise price, risk-free rate, variance of the underlying asset, and time to
expiration
E) Exercise price, probability of occurrence, stock price, variance of the underlying asset, and
time to expiration
51) The delta of a call measures the:
A) time remaining to expiration compared to the option's original maturity.
B) change between an option's original value and its current value.
C) swing in the price of the call relative to the swing in the underlying stock price.
D) ratio of the change in the option price to the change in the time to expiration.
E) volatility of the underlying security.
52) You own stock in a firm that has a pure discount loan due in six months. The loan has a face
value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this
firm basically own a ________ option on the assets of the firm with a strike price of ________
A) put; $62,000.
B) put; $50,000.
C) warrant; $62,000.
D) call; $62,000.
E) call; $50,000.
53) If you consider the equity of a firm to be an option on the firm's assets then the act of paying
off debt is comparable to ________ on the assets of the firm.
A) purchasing a put option
B) purchasing a call option
C) exercising an in-the-money put option
D) exercising an in-the-money call option
E) selling a call option
54) For every positive net present value project that a firm undertakes, the equity in the firm will
increase the most if the delta of the call option on the firm's assets is:
A) equal to one.
B) between zero and one.
C) equal to zero.
D) between zero and minus one.
E) equal to minus one.
55) Assume a risky firm has both bondholders and stockholders. If the firm obtains a government
loan guarantee on its existing debt, who will gain from this guarantee?
A) Existing stockholders only
B) Both existing bondholders and stockholders in proportion to the firm's debt-equity ratio
C) Existing bondholders and stockholders on an equal basis
D) Existing bondholders only
E) Future stockholders only
56) If you consider bondholders to be the owners of a firm, then those bondholders:
A) own a call option on the firm with an exercise price equal to the firm's total equity.
B) own a put option on the firm with an exercise price equal to the firm's total debt.
C) have written a put option on the firm with an exercise price equal to the firm's total equity.
D) have written a call option on the firm with an exercise price equal to the firm's total debt.
E) own a put option on the firm with an exercise price equal to the firm's total assets.
57) If you consider stockholders to be the owners of a firm, then those stockholders:
A) own a call option on the firm with an exercise price equal to the firm's total equity.
B) own a put option on the firm with an exercise price equal to the firm's total debt.
C) have written a put option on the firm with an exercise price equal to the firm's total equity.
D) have written a call option on the firm with an exercise price equal to the firm's total debt.
E) own a put option on the firm with an exercise price equal to the firm's total assets.
58) A purely financial merger:
A) increases shareholder value but does not affect bondholders.
B) decreases both bondholder and shareholder values.
C) transfers bondholder value to shareholders.
D) increases bondholder value but does not affect shareholder value.
E) reduces shareholder value while increasing bondholder value.
59) Shareholders in a levered firm might wish to accept a negative net present value project if it:
A) increases the standard deviation of the returns on the firm's assets.
B) lowers the variance of the returns on the firm's assets.
C) lowers the firm's volatility.
D) diversifies the cash flows of the firm.
E) decreases the risk that a firm will default on its debt.
60) Alicia is considering purchasing a small building with the intent of opening a craft and
sewing center. The cost of the building is $49,000 and the cost to open the center is an additional
$150,000. If the center is opened and no other competition is nearby the project will provide a
hefty return. However, should the vacant building down the street be used for a competitive type
entity, then the center could be a losing proposition. Assume the building is purchased but the
opening of the center is delayed. This situation would best be described as ________ on a craft
and sewing center.
A) purchasing a call option
B) writing a call option
C) purchasing a put option
D) writing a put option
E) exercising a call on the land and writing a put
61) You purchased eight TJH call option contracts with a strike price of $37.50 when the option
quote was $.55. The option expires today when the value of TJH stock is $37.10. Ignoring
trading costs and taxes, what is your total profit on your investment?
A) $0
B) −$120
C) −$440
D) $420
E) $760
62) You purchased five WXO 30 call option contracts at a quoted price of $.34. What is your
total profit on this investment if the price of WXO is $33.60 on the option expiration date?
A) $170
B) $326
C) $1,630
D) $1,440
E) $1,576
63) You own two call option contracts on ABC stock with a strike price of $15. When you
purchased the contracts the option price was $1.20 and the stock price was $15.90. What is the
total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?
A) $280
B) $180
C) $100
D) $0
E) $29
64) Last week, you purchased one call option contract on DI stock with a strike price of $32.50
and an option price of $1.05. What is the intrinsic value per share of stock if DI is currently
priced at $34.10?
A) $2.15
B) $1.60
C) $.55
D) $.93
E) $0
65) You purchased five CVB call option contracts with a strike price of $40 when the option was
quoted at $3.65. The option expires today when the value of CVB stock is $43. Ignoring trading
costs and taxes, what is your total profit on your investment?
A) $0
B) −$325
C) $800
D) $1,500
E) −$1,825
66) You purchased two WXO 15 call option contracts at a quoted price of $.08. What is your
total profit on this investment if the price of WXO is $14.80 on the option expiration date?
A) −$20
B) −$16
C) $12
D) $16
E) $20
67) Three weeks ago, you purchased a July 45 put option on RPJ stock at an option price of
$3.20. The market price of RPJ stock three weeks ago was $42.70. Today, RPJ stock is selling at
$44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put
contract?
A) $295
B) $210
C) $0
D) $25
E) $110
68) You own ten put option contracts on XYZ stock with an exercise price of $25. What is the
total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?
A) −$500
B) −$50
C) $0
D) $50
E) $500
69) Three months ago, you purchased three put option contracts on WXX stock with a strike
price of $60 and an option price of $.60. The option expires today when the value of WXX stock
is $48.10. Ignoring trading costs and taxes, what is your total profit on your investment?
A) $180
B) $3,390
C) $60
D) $1,130
E) $1,090
70) Three months ago, you purchased a put option contract on WXX stock with a strike price of
$61 and an option price of $.60. The option expires today when the value of WXX stock is
$63.50. Ignoring trading costs and taxes, what is your total profit on your investment?
A) $310
B) −$60
C) $0
D) $60
E) −$190
71) You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an
option price of $1.20. Today, the option expires and the underlying stock is selling for $33 a
share. Ignoring trading costs and taxes, what is your total profit on this investment?
A) −$3,300
B) −$1,200
C) $120
D) $1,200
E) $3,300
72) You sold a put contract on EDF stock at an option price of $.50 and an exercise price of $21.
Today, EDF stock is selling for $20 a share and your option position was closed out. Ignoring
transaction costs and taxes, what is your total profit?
A) $50
B) $60
C) −$50
D) −$60
E) $0
73) You wrote ten call option contracts on JIG stock with a strike price of $41 and an option
price of $.60. What is your total profit on this investment if the price of JIG is $46.05 on the
option expiration date?
A) −$5,050
B) −$4,450
C) $4,100
D) $4,450
E) $5,050
74) You wrote ten put option contracts on JIG stock with a strike price of $40 and an option
price of $.40. What is your total profit on this investment if the price of JIG is $41.05 on the
option expiration date?
A) $6,450
B) $5,650
C) $400
D) −$5,650
E) −$6,450
75) You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an
option price of $1.10. Today, the option expires when the underlying stock is selling for $34.30 a
share. Ignoring trading costs and taxes, what is your total profit on this investment?
A) $2,900
B) − $1,100
C) $700
D) $1,100
E) − $2,900
76) You sold a put contract on EDF stock at an option price of $.25 and an exercise price of
$22.50. The option expires today when EDF stock is selling for $21.70 a share. Ignoring
transaction costs and taxes, what is your total profit on this investment?
A) $105
B) −$55
C) −$25
D) $55
E) $0
77) What is the cost of four October 40 put option contracts on a stock given the following price
quotes?
Stock price $40.86
Expiration:
Strike
Call bid
Call ask
Put bid
Put ask
Jul
35
6.03
6.12
0
0
Oct
35
6.17
6.26
0
0
Jul
40
1.06
1.14
.05
.08
Oct
40
1.23
1.31
.22
.26
Jul
45
0
0
5.13
5.25
Oct
45
0
0
5.46
5.50
A) $22
B) $26
C) $240
D) $88
E) $104
78) What is the value of one August 25 call option contract?
KNJ (KNJ)
Underlying stock price: 30.86
Call
Put
Expiration
Strike
Last
Last
Aug
25
6.15
.05
Nov
25
6.60
.10
Aug
35
.10
4.60
Nov
35
.70
5.10
A) $4.60
B) $.10
C) $615
D) $10
E) $6.15
79) The market price of ABC stock has been very volatile and you think this volatility will
continue for several weeks. Thus, you decide to purchase one two-month call option contract on
ABC stock with a strike price of $25 and an option price of $1.30. You also purchase one two-
month put option on ABC stock with a strike price of $25 and an option price of $.50. What will
be your total profit on these positions if the stock price is $25.60 on the day the options expire?
A) −$180
B) −$120
C) $100
D) $120
E) $180
