Chapter 20

The value of any option (both call and put options) is positively related to the: I) volatility of the underlying stock price; II) time to expiration; III) risk-free rate

A. I and II only

Which of the following investors would be happy to see the stock price rise sharply? I) An investor who owns the stock and a put option; II) An investor who has sold a put option and bought a call option; III) An investor who owns the stock and has sold a call option; IV) An investor who has sold a call option

A. I and II only

The value of a call option is negatively related to the: I) exercise price; II) risk-free rate; III) time to expiration

A. I only

The value of a put option is negatively related to the: I) stock price; II) volatility of the underlying stock price; III) exercise price

A. I only

The value of a put option is positively related to the: I) exercise price; II) time to expiration; III) volatility of the underlying stock price; IV) risk-free rate

A. I, II, and III only

If the stock makes a dividend payment before the expiration date, then the put-call parity relation is:

A. Value of call = value of put + share price - present value (PV) of dividend - PV of exercise price.

Relative to the underlying stock, a call option always has:

A. a higher beta and a higher standard deviation of return.

If the risk-free interest rate increases, then:

A. call option prices increase.

The owner of a regular exchange-listed call-option on a stock:

A. has the right to buy 100 shares of the underlying stock at the exercise price.

Buying the stock and the put option on the stock provides the same payoff as:

A. investing the present value of the exercise price in T-bills and buying the call option on the stock.

For European options, the value of a put is equal to:

A. the value of a call minus the value of a share plus the present value of the exercise price.

If the stock price follows a random walk, successive price changes are statistically independent. If σ2 is the variance of the daily price change, and there are t days until expiration, the variance of the cumulative price change is

B. (σ^2) × (t)

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

B. Equal to the exercise price regardless of the stock price

An investor, in practice, can buy: I) an option on a single share of stock; II) options that are sold in blocks of 100 options per block; III) a minimum order of 100 options on a share of stock

B. II and III only

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs.)

C. The exercise price.

From a geometric viewpoint, how is the position diagram for a put option related to the diagram of a call option on the same stock having the same exercise price and maturity?

C. The mirror image of the call diagram, reflected around the exercise price

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

C. The owner will not exercise his option.

The value of a call option, beyond the stock price less the exercise price, is most likely to be realized when the option is:

C. at the money.

Buying a call option, investing the present value of the exercise price in T-bills, and short-selling the underlying share is the same as

C. buying a put.

Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by:

C. buying the underlying stock and buying a put.

Put-call parity can be used to show:

C. the precise relationship between put and call option prices given equal exercise prices and equal expiration dates.

For European options, the value of a call plus the present value of the exercise price is equal to:

C. the value of a put plus the value of a share.

The writer (seller) of a regular exchange-listed put-option on a stock:

has the obligation to buy 100 shares of the underlying stock at the exercise price.

A put option gives the owner the right:

D. but not the obligation to sell an asset at a given price.

The writer (seller) of a regular exchange-listed call-option on a stock:

D. has the obligation to sell 100 shares of the underlying stock at the exercise price.

For European options, the value of a call minus the value of a put is equal to:

D. the value of a share minus the present value of the exercise price

If the volatility of the underlying asset decreases, then the:

D. value of both the put and call option will decrease.

An option that can be exercised any time before its expiration date is called:

B. an American option.

The owner of a regular exchange-listed put-option on a stock:

B. has the right to sell 100 shares of the underlying stock at the exercise price.

The value of a put option at expiration equals the:

B. higher of the exercise price minus market price of the share and zero.

The buyer of a call option has the right to exercise the option, but the writer of the call option has the:

B. obligation to deliver the shares at the exercise price.

All else equal, as the underlying stock price increases:

B. the call price increases.

All else equal, as the underlying stock price increases:

B. the put price decreases.

The two principal options exchanges in the U.S. are the: I) International Securities Exchange; II) New York Stock Exchange; III) NASDAQ; IV) Chicago Board of Options Exchange

C. I and IV only

The value of a call option is positively related to the following: I) underlying stock price; II) risk-free rate; III) time to expiration; IV) volatility of the underlying stock price

D. I, II, III, and IV

Firms regularly use the following to reduce risk: I) currency options; II) interest-rate options; III) commodity options

D. I, II, and III

The following are examples of "disguised options": I) acquiring growth opportunities; II) ability of the firm to terminate a project when it is no longer profitable; III) covenants within corporate securities that provide flexibility to change the terms of the securities

D. I, II, and III

Which of the following features increase(s) the value of a call option? I) A high interest rate; II) A long time to maturity; III) A higher volatility of the underlying stock price

D. I, II, and III

In June 2017, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2019. If the stock price in July 2017 is $80, then this option is: I) in-the-money II) out-of-the-money III) a LEAPS option

D. II and III only

In June 2017, an investor buys call options on Amgen stock with an exercise of price of $65 and expiring in January 2019. If the stock price in June 2018 is $60, then these options are: I) in-the-money; II) out-of-the-money; III) a LEAPS option

D. II and III only

Suppose the underlying stock pays a dividend before the expiration of options on that stock. This will: I) increase the value of a call option; II) increase the value of a put option; III) decrease the value of a call option; IV) decrease the value of a put option

D. II and III only