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80) Several rumors concerning Wyslow stock have started circulating. These rumors are causing
the market price of the stock to become increasingly volatile. Given this situation, you decide to
buy both a one-month put and a one-month call option on this stock with an exercise price of
$15. You purchased the call at a quoted price of $.20 and the put at a price of $2.10. What will
be your total profit on these option positions if the stock price is $6 on the day the options
expire?
A) $30
B) $670
C) $690
D) $710
E) $1,110
81) Tru-U stock is selling for $41 a share. A 6-month call on Tru-U stock with a strike price of
$45 is priced at $1.60. Risk-free assets are currently returning .29 percent per month. What is the
price of a 6-month put on Tru-U stock with a strike price of $45?
A) $2.98
B) $3.00
C) $4.63
D) $4.82
E) $4.90
82) GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike price of
$35 is priced at $.55. Risk-free assets are currently returning .3 percent per month. What is the
price of a 4-month put on GSX stock with a strike price of $35?
A) $2.46
B) $3.48
C) $4.09
D) $2.73
E) $3.02
83) J&L stock has a current market price of $47.60 a share. The one-year call on this stock with
a strike price of $45 is priced at $3.20 while the one-year put with a strike price of $45 is priced
at $.15. What is the risk-free rate of return?
A) 2.71 percent
B) 1.76 percent
C) 1.01 percent
D) 2.04 percent
E) 2.87 percent
84) The market price of ABC stock has been very volatile and you think this volatility will
continue for a few weeks. Thus, you decide to purchase a one-month call option contract on this
stock with a strike price of $25 and an option price of $1.50. You also purchase a one-month put
option on this stock with a strike price of $25 and an option price of $.70. What will be your total
profit on these option positions if the stock price is $24.60 on the day the options expire?
A) −$180
B) −$140
C) −$100
D) $220
E) $140
85) Due to technological and market developments, the price of Beta stock has become quite
volatile. Given this, you decide to buy two one-month put option contracts and two one-month
call option contracts on this stock with an exercise price of $15. You purchased the calls at a
quoted price of $.40 and the puts at a price of $2.30. What will be your total profit on these
positions if the stock price is $29 on the day the options expire?
A) $1,890
B) $2,720
C) $2,260
D) $1,130
E) $1,360
86) You own a call option on Jasper Co. stock that expires in one year. The exercise price is $35.
The current price of the stock is $48 and the risk-free rate of return is 4.5 percent. Assume the
option will finish in the money. What is the current value of the call option per share?
A) $13.00
B) $13.59
C) $13.97
D) $14.51
E) $15.46
87) You currently own a one-year call option on WOI stock with a strike price of $20. The
current stock price is $22.10 and the risk-free rate of return is 3.75 percent. If you assume the
option finishes in the money, what is the current value of your call option per share?
A) $2.02
B) $2.18
C) $1.76
D) $3.13
E) $2.82
88) The common stock of Mercury Motors is selling for $28.97 a share while one-year U.S.
Treasury securities are currently yielding 2.8 percent. What is the current value per share of a
one-year call option on Mercury Motors stock if the exercise price is $22.50 and you assume the
option will finish in the money?
A) $6.29
B) $6.40
C) $6.65
D) $7.67
E) $7.08
89) The common stock of WIN is currently priced at $52.50 a share. One year from now, the
stock price is expected to be either $54 or $60 a share. The risk-free rate of return is 4 percent.
What is the per share value of one call option on WIN stock with an exercise price of $55?
A) $.39
B) $.41
C) $.45
D) $.48
E) $.51
90) You own one call option with an exercise price of $30 on Nadia stock. This stock is currently
selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next
year. The risk-free rate of return is 5 percent. What is the current per share value of your option
if it expires in one year?
A) $.76
B) $.79
C) $.89
D) $.92
E) $.95
91) The assets of Green Light Specials are currently worth $2,100. These assets are expected to
be worth either $1,800 or $2,300 one year from now. The company has a pure discount bond
outstanding with a $2,000 face value and a maturity date of one year. The risk-free rate is 5
percent. What is the value of the equity in this firm?
A) $166.67
B) $231.43
C) $385.71
D) $405.00
E) $714.29
92) Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value
of $1,000. The risk-free rate of return is 4 percent. The assets of Big Ed's are expected to be
worth either $800 or $1,300 in one year. Currently, these assets are worth $1,140. What is the
current value of the debt of Big Ed's Electrical?
A) $222.46
B) $370.77
C) $514.28
D) $769.23
E) $917.54
93) Martha B's has total assets of $1,810. These assets are expected to increase in value to either
$1,900 or $2,400 by next year. The company has a pure discount bond outstanding with a face
value of $2,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.5
percent. What is the value of the equity in this firm?
A) $6.98
B) $7.24
C) $6.67
D) $7.08
E) $7.89
94) What is the value of d2 given the following information?
Stock price
$
59
Exercise price
$
60
Time of expiration
.50
Risk-free rate
4.5
%
Standard deviation
18
%
d1
.108367
A) .0133
B) −.0189
C) −.0460
D) .0867
E) −.0019
95) Given the following information, what is the value of d2 as it is used in the Black-Scholes
model?
Stock price
$
36
Exercise price
$
40
Time of expiration
.25
Risk-free rate
3.75
%
Standard deviation
26
%
d1
−
.673350
A) .0216
B) −.8034
C) .1756
D) −.20021
E) .0251
96) What is the value of a call given the Black-Scholes model and the following information?
Stock price = $44, Exercise price = $40, Time to expiration = .75, Risk-free rate = 4.5%,
Standard deviation = 25%, N(d1) = .759395, and N(d2) = .687172.
A) $2.03
B) $4.86
C) $6.84
D) $8.81
E) $9.27
97) Assume the delta of a call option on a firm's assets is .608. This means a project valued at
$65,000 will increase the value of the firm's equity by:
A) $27,902.
B) $39,520.
C) $43,820.
D) $63,131.
E) $89,600.
98) The current market value of the assets of Bigelow Inc. is $91 million, with a standard
deviation of 19 percent per year. The firm has zero-coupon bonds outstanding with a total face
value of $45 million. These bonds mature in 2 years. The risk-free rate is 4 percent per year
compounded continuously. What is the value of d1?
A) 3.05
B) 3.62
C) 2.48
D) 2.71
E) 3.46
99) The current market value of the assets of ABCD is $86.28 million. The call option value on
the firm's assets is $53.09 million. What is the market value of the firm's debt?
A) $74.49 million
B) $31.36 million
C) $33.19 million
D) $44.08 million
E) $139.37 million
100) Suppose your wealthy Aunt Minnie has asked you to manage her large stock portfolio. You
would like to use options to increase her total return and also reduce her risks. Describe the types
of options you would buy or sell, as well as your rationale, given the following circumstances:
∙ Aunt Minnie owns 10,000 shares of a large oil company common stock. You believe the
stock is overpriced, but she won't let you sell any shares because her late husband told her to
never, ever sell any. How do you protect her from what you believe is an impending price
decline?
∙ Your analysis suggests that a technology stock is poised for a large price increase within the
next year. Aunt Minnie won't agree to spend the dollars required to obtain shares but has
consented to allow you to spend some money on options but only because she trusts you. You
don't want to disappoint her. What should you do?
101) Suppose you look in the newspaper and see ABC trading at $50 per share. Calls on ABC
with one month to expiration and an exercise price of $45 are trading at $6.50 each. Puts on ABC
with one month to expiration and an exercise price of $55 are trading at $3.50 each. Are these
prices reasonable? Explain. (Ignore transactions costs.)
102) Suppose XYZ is priced at $125 a share. The 150 call has six months to expiration and is
quoted at $.05. Why do you suppose investors would be willing to purchase a call that is so far
out of the money?
103) What are the upper and lower bounds of an American call option? Explain what would
happen in each case if the bound was violated.
104) Explain the rationale behind the statement that equity is a call option on the firm's assets.
When would a shareholder allow the call to expire?
105) How do options apply to capital budgeting? Explain and provide an example.
