Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1. The seller of a put option is betting that the market value of the stock will decrease.
2. The VIX is an estimate of expected future market volatility over the next 30 calendar days.
3. A call option is worthless if the underlying stock is worthless.
4. The lower limit on a call option's value is equal to the greater of zero or the exercise price
minus the stock price.
5. Put-call parity holds only if an investor plans to hold the options to maturity.
6. The price of a call option increases as the exercise price decreases.
7. The Financial Accounting Standards Board (FASB) requires that companies recognize the
fact that employee stock options are valuable and therefore are an expense just like salaries and
wages.
8. The Financial Accounting Standards Board (FASB) stipulates that companies must use an
option valuation model to estimate the fair value of any option grants and then deduct this value
when calculating profits.
9. The value of both call and put options increases as the variability of the stock price
decreases.
10. Callable bonds allow the investor to redeem the bond at face value or let the bond remain
outstanding until maturity.
11. Warrants do not expire.
12. Convertible bonds give the investor the option to buy the firm's stock in exchange for the
value of the underlying bond.
13. Callable bonds give the call option to the issuing firm and hence reduce the value of the
bond.
14. The longer the time until expiration of a call option, the lower the value of the option.
15. Only at the expiration date can an investor expect to find the value of call options above
their lower bound.
16. Stock price volatility is beneficial to option holders.
17. Unlike call options, the option to abandon a real asset project does not become more
valuable as time to expiration increases.
18. A callable bond gives the issuer a potentially valuable option in the case of changing
interest rates.
19. At expiration a call option will have no value if the stock price is less than exercise price.
20. At expiration a put option will have no value if the stock price is less than the exercise
price.
21. A protective put is a costless way of eliminating the downside risk of holding stock.
22. The value of a call option increases as the strike price increases.
23. When the stock price is very high compared to the exercise price, the call option premium
approximates the difference between the stock price and the present value of the strike price.
24. Warrants are long-term call options on a company's stock issued by an organized stock
exchange.
25. A warrant is a long-term call option that is "in the money" at the time of issuance.
26. A callable bond will have a lower value than a straight bond with the same coupon rate
and maturity.
27. The floor of a convertible bond will be the value of the underlying bond.
28. The value of a convertible bond is always less than the value of a straight bond with
similar coupon and maturity.
29. A writer of a call option expects the stock price to:
30. Adding warrants as a "sweetener" to bonds will:
31. If the owner of a call option with a strike price of $35 finds the stock to be trading for $42
at expiration, then the option:
32. Which one of the following is true for the owner of a call option?
33. An increase in which one of the following will decrease the value of a call option?
34. What is the difference between an American call option and a European call option?
35. What is the option buyer's total profit or loss per share if a call option is purchased for a
$5 premium, has a $50 exercise price, and the stock is valued at $53 at expiration?
36. Calculate the profit per share for an investor that exercises a put option with a strike
price of $60 when the stock is selling for $46 and the premium for the put option was $4.
37. Which one of the following option traders receive the option premium?
38. Which one of the following is true for an investor who purchased a share of stock for $45
and purchased a $45 put option on the stock?
39. What is the profit per share for an investor who has purchased a share of stock for $42
and purchased a put option with an exercise price of $40 and a premium of $2 if the stock was
valued at $30 at expiration?
40. Which combination of positions will tend to protect the owner from downside risk?
41. If you feel strongly that a stock price will move, but are unsure of the direction, you could
buy the stock and:
42. A stock is currently selling for $70 per share and its call option has an exercise price of
$90. What is the lower limit on the value of the call option?
43. Why is the value of a call option said to increase as the interest rate increases?
44. Owning a call option that has a high probability of being exercised is said to be almost
equivalent to owning the stock. In which way is owning a call
not
equivalent to owning the stock?
45. How much must the stock be worth at expiration in order for a call holder to break even if
the exercise price is $50 and the call premium was $4?
46. What is the worst-case profitability scenario for an investor who sold a call on the firm's
stock for a premium of $10 and a strike price of $100?
47. Which one of the following call options would command the higher premium, other things
equal? (All months are within the same calendar year.)
48. A decrease in which one of the following terms will cause an increase in the call value of
an option?
