Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
All of the following are true of calls and puts EXCEPT
1)
A)
options are issued by businesses.
B)
the financial manager of a company has very little need to deal with options.
C)
the presence of options trading in the firm’s stock could, by increasing trading activity,
stabilise the firm’s share price in the marketplace.
D)
options are not a source of funding to the corporation.
2)
A ________ option is an option to purchase a specified number of shares of a stock on or before
some future date at a specified price, whereas a ________ option is an option to sell a specified
number of shares of a stock on or before some future date at a specified price. ________ are
purchased if the stock price is expected to fall.
2)
A)
put; call; Calls
B)
call; put; Puts
C)
put; call; Puts
D)
call; put; Calls
3)
A security that is neither debt nor equity but derives its value from an underlying asset is called
a(n)
3)
A)
hybrid security.
B)
operating lease.
C)
option.
D)
derivative security.
4)
All of the following are true of calls and puts EXCEPT
4)
A)
the presence of options trading in the firm’s stock could, by increasing trading activity,
stabilise the firm’s share price in the marketplace.
B)
the financial manager of a company has very little need to deal with options.
C)
options are issued by businesses.
D)
options are not a source of funding to the corporation.
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5)
For puts and calls, the exercise price is called
5)
A)
the expected value.
B)
the option price.
C)
the market price.
D)
the strike price.
6)
An investor is considering buying 500 shares of ABC Company at €32 per share. Analysts agree
that the firm’s share price may increase to €45 per share in the next four months. As an alternative,
the investor could purchase a 120–day call option at a strike price of €30 for $5,000. What profit
would the investor realise if the share price increased to €42 per share?
6)
A)
B)
C)
D)
7)
The option buyer who expects a stock price to decline will purchase
7)
A)
a put.
B)
a convertible bond.
C)
a warrant.
D)
a call.
8)
Which of the following statements about put and call options is false?
8)
A)
They are a form of deferred equity financing by the firm.
B)
They provide the buyer with an opportunity to earn larger returns than simply buying or
selling ordinary shares.
C)
They can be used to lock in a gain or prevent a loss on a shareholding.
D)
They are traded on organized exchanges.
9)
An investor is considering buying 500 shares of ABC Company at €32 per share. Analysts agree
that the firm’s share price may increase to €45 per share in the next four months. As an alternative,
the investor could purchase a 120–day call option at a strike price of €30 for $5,000. What profit
would the investor realise if the share price increased to €42 per share?
9)
A)
B)
C)
D)
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10)
For puts and calls, the exercise price is called
10)
A)
the market price.
B)
the expected value.
C)
the strike price.
D)
the option price.
11)
A security that is neither debt nor equity but derives its value from an underlying asset that is often
another security is called
11)
A)
derivative security.
B)
none of the above.
C)
hybrid security.
D)
convertible security.
A
12)
An investor is considering buying 500 shares of ABC Company at £32 per share. Analysts agree
that the firm’s share price may increase to £45 per share in the next 4 months. As an alternative, the
investor could purchase a 120–day call option at a strike price of £30 for £5,000. At which share
price would the investor break even?
12)
A)
$45.
B)
$42.
C)
$35.
D)
$40.
D
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
13)
Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share.
Because the economy is picking up, Nico believes the demand for Oracle’s router systems
will increase substantially causing the price of Cisco’s shares to increase to $30 per share.
As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco
at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction
costs and dividends. By how much must the share price rise for Nico to break even on the
option transaction?
13)
3
C
14)
Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share.
Because the economy is picking up, Nico believes the demand for Oracle’s router systems
will increase substantially causing the price of Cisco’s shares to increase to $30 per share.
As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco
at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction
costs and dividends. How much will Nico earn on the option transaction if he purchases
the option and the underlying share price rises to $30?
14)
15)
Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share.
Because the economy is picking up, Nico believes the demand for Oracle’s router systems
will increase substantially causing the price of Cisco’s shares to increase to $30 per share.
As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco
at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction
costs and dividends. What will Nico’s profit be on the share transaction if he decides to
buy the stock and its price does increase to $30 per share and he sells?
15)
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
16)
In the OTC market, the prices at which securities are traded result from both competitive bids and
negotiation.
16)
17)
The option buyer who expects a stock price to decline will purchase a put option.
17)
18)
A firm can raise capital by issuing securities such as convertibles and warrants but a firm has
nothing to do with the creation of options to raise capital.
18)
19)
A call option is an option to sell a specified number of shares of a stock on or before some future
date at a stated price.
19)
20)
The strike price is the price at which the holder of a call option can buy a specified number of
shares at any time prior to the option’s expiration date.
20)
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21)
Options provide the holder with the right to purchase or sell specified assets at a stated price on or
before a set expiration date.
21)
22)
The Over–the–Counter (OTC) exchange is not an organization but an intangible market for trading
securities which are not listed by the organized exchanges.
22)
23)
Derivatives are used by corporations as a useful tool for managing certain aspects of the firm’s risk.
23)
24)
Unlike the organized exchanges, the OTC makes a market in both outstanding securities and new
public issues, making it both a secondary and a primary market.
24)
25)
Call options are purchased with the expectation that the market price of the underlying security
will rise while put options are purchased with the expectation that the market price of the
underlying security will fall
25)
26)
A firm can raise capital by issuing securities such as convertibles, warrants, calls and puts.
26)
27)
An option is a security that is neither debt nor equity but derives its value from an underlying asset
that is often another security.
27)
28)
Call options are purchased with the expectation that the market price of the underlying security
will fall while put options are purchased with the expectation that the market price of the
underlying security will rise.
28)
29)
A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.
29)
30)
A derivative security is neither debt nor equity but instead derives its value from an underlying
asset.
30)
5
Explanation:
Answer Key
Testname: C24
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