Ch. 24

Which one of the following describes the intrinsic value of a put option?

Greater of the strike price minus the stock price or zero

In the money

S1 > exercise price

out of the money

S1 ends up being below the exercise price on the experation date, then the call option is work zero

Excercising the option

act of buying or selling the underlying asset via the option contract

When warrants are exercised, the:

earnings per share decrease.

Put option

the right to sell an asset at a fixed price Investor who sells a put option receives cash up front and is then obligated to buy the asset at the exercise price if the otion holder demands it

Which one of the following statements concerning convertible bonds is false?

A convertible bond should always be worth less than a comparable straight bond.

Which one of the following will decrease the value of an American call option?

A decrease in the value of the underlying security

Assume you purchase one call option contract on a stock that is currently selling for $12 per share. What is the maximum amount you can lose?

The option premium per share

Call option

The risk to buy an asset at a fixed price An investor that sells a call option receives money up front and has the obligation to sell the asset at the exercise price if the option holder wants it

option

a contract that gives its owner the right to buy or sell some asset at a fixed price on or before a given date

Warrant

a security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time, similar to call options, however have much longer periods that call options

Employee Stock Option (ESO)

an option granted to an employee by a company giving the employee the right to buy shares of stock in the company at a fixed price for a fixed time, powerful motivator!

Conversible bond

bond that can be exchanged for a fixed number of shares of stock for a specificed amount of time

When you purchase insurance you are in essence:

buying a put option.

conversion premium

difference between the conversion price and the current stock price, divided by the current stock price

conversion price

dollar amount of a bond's par value that is exchangeable for one share of stock

what is zero sum game

either the buyer or seller loses of wins, never both

investment timing decision

evaluation of the optimal time to begin a project

present value of exercise price on option equation

exercise price / (1 + risk free rate)

A call option will always sell

for no more than the underlying asset

Correlation between stock price and call worth

higher stock price (S0) means higher call worth

correlation between risk free rate and call worth

higher the risk free rate, the more the call is worth

Contigency planning - option to expand

includes increasing production or improving cash flow by raising the product's price

Contigency planning - option to scale back (abandon)

involves selling off some capacity or putting it to another use

Contigency planning - option to suspend or contract operations

involves temporarily shutting down an activity of some sort and its particlarly valuable in natual resource extraction

expiration date

last day on which an option may be exercised

managerial options

opportunities that managers can exploit if certain things happen in the future, ways in which the poduct is prices, advertised, etc.

american option

option that may be exercised at any time until its expiration date

European option

option that may be exercised only on the expiration date

Strategic options

options for future, related business products or strategies

Valuing the option to wait:

requires at least two NPV calculations as of Time 0.

Does an option give the buyer the right or abligation to do something

right

S1

stock prive at expiration

Call option value calculation

stock value - present value of exercise price

same meaning as warrant

sweenteners or equity kickers

contigency planning

taking into account the managerial options implicit in a project

Strike price/ excercise price

the fixed price in the option contract at which the holder can buy or sell the underlying asset

correlation between exercise price and call worth

the higher the exercise price, the less the call is worth

correlation between time to expiration and option worth

the longer the time to expiration means the more the option is worth

conversion ratio

the number of shares per bond received for conversion into stock

S0

underlying asset, what is is worth on the day one of option

The maximum value of a call option can never exceed the:

underlying stock price.

Conversion Value

value a convertible bond qould have if it were to be immediately converted into common stock

C1

value of call option on the expiration date

Straight bond value

vaue a convertible bond would have if it could not be converted into common stock

intrinsic value

what the option would be worth if it were about to expire

ESO "under water"

when the stock falls significantly after an EDO is granted

Stock options are a (what kinda game)

zero-sum game