CF 22

call option

A _____ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.

put option

A _____ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.

option

A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.

out of the money

A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36. The put is:

arbitrage

A trading opportunity that offers a riskless profit is called a(n):

has an exercise price greater than the underlying stock price

An in-the-money put option is one that:

a european put

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called:

american

An option that may be exercised at any time up to its expiration date is called a(n) _____ option.

european

An option that may be exercised only on the expiration date is called a(n) _____ option.

both should not be exercised; and has an increase price above the current market price of the underlying security

An out-of-the-money call option is one that:

$39,600

Assume that the delta of a call option on a firm's assets is .792. This means that a $50,000 project will increase the value of equity by:

the time premiums on both your put and call are less than the time premiums on equivalent June options

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

$917.54

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%. 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?

equal to one

For every positive net present value project that a firm undertakes, the equity in the firm will increase the most if the delta of the call option on the firm's assets is:

$3.23

GS, Inc. stock is selling for $28 a share. A 3-month call on GS stock with a strike price of $30 is priced at $1.50. Risk-free assets are currently returning 0.3% per month. What is the price of a 3-month put on GS stock with a strike price of $30?

the share of stock plus the put option

Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to:

.125161

Given the following information, what is the value of d2 as it is used in the Black-Scholes Option Pricing Model? Stock price $42 Time to expiration .25 Risk-free rate .055 Standard deviation .50 d1 .375161

in the money

If a call has a positive intrinsic value at expiration the call is said to be:

exercising an in-the-money call option

If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to _____ on the assets of the firm.

less than or equal to d1

In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is:

2.80%

J&L, Inc. stock has a current market price of $55 a share. The one-year call on J&L stock with a strike price of $55 is priced at $2.50 while the one-year put with a strike price of $55 is priced at $1. What is the risk-free rate of return?

american put

Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares. Jeff must have owned a(an):

I and III only

Jillian owns an option which gives her the right to purchase shares of WAN stock at a price of $20 a share. Currently, WAN stock is selling for $24.50. Jillian would like to profit on this stock but is not permitted to exercise her option for another two weeks. Which of the following statements apply to this situation? I. Jillian must own a European call option. II. Jillian must own an American put option. III. Jillian should sell her option today if she feels the price of WAN stock will decline significantly over the next two weeks. IV. Jillian cannot profit today from the price increase in WAN stock.

$1.53

Last week, you purchased a call option on Denver, Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver, Inc. stock is currently priced at $29.03?

$34.59

Martha B's has total assets of $1,750. These assets are expected to increase in value to either $1,800 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 6%. What is the value of the equity in this firm?

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

Put-call parity can be used to show:

$870

Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite 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 or loss on these option positions if the stock price is $4 on the day the options expire?

$830

Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite 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 $.40 and the put at a price of $2.30. What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?

it increases the standard deviation of the returns on the firm's assets

Shareholders in a leveraged firm might wish to accept a negative net present value project if:

both changes cause the price of the call option to increase

Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on a call option of Tele-Tech Com?

the greater uncertainty will cause the price of the put option to increase. the higher price of the stock will cause the price of the put option to decrease

Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on a put option of Tele-Tech Com?

stock price, exercise price, risk free rate, variance and time to maturity

The Black-Scholes option pricing model is dependent on which five parameters?

exercising

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option.

$231.42

The assets of Blue 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%. What is the value of the equity in this firm?

$8.01

The common stock of Mercury Motors is selling for $43.90 a share. U.S. Treasury bills are currently yielding 4.5%. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?

$0.48

The common stock of Winsson, Inc. 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%. What is the value of one call option on Winsson stock with an exercise price of $55?

$42.72 million

The current market value of the assets of ABC, Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the firm's debt?

3.54

The current market value of the assets of Bigelow, Inc. is $86 million, with a standard deviation of 15% 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% per year compounded continuously. What is the value of d1?

the swing in the price of the call relative to the swing in the stock price

The delta of a call measures:

can be exercised at any time up the expiration date while the european call can only exercised on the expiration date

The difference between an American call and a European call is that the American call:

delta

The effect on an option's value of a small change in the value of the underlying asset is called the option:

strike price

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's

I, II, and IV only

The intrinsic value of a call is: I. the value of the call if it were about to expire. II. equal to the lower bound of a call's value. III. another name for the market price of a call. IV. always equal to zero if the call is currently out of the money.

greater of the strike price minus the stock price or zero

The intrinsic value of a put is equal to the:

expiration

The last day on which an owner of an option can elect to exercise is the _____ date.

can be equal to zero

The lower bound of a call option:

stock price minus the exercise price or zero, whichever is greater

The lower bound on a call's value is either the:

-$140

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 ABC stock with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?

-$180

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 ABC stock with a strike price of $25 and an option price of $1.50. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.70. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?

the price of the underlying stock

The maximum value of a call option is equal to:

right but not the obligation to buy a stock at a specified price on a specified date

The owner of a call option has the:

put-call parity

The relationship between the prices of the underlying stock, a call option, a put option, and a riskless asset is referred to as the _____ relationship.

I , II, III, and IV

The value of a call increases when: I. the time to expiration increases. II. the stock price increases. III. the risk-free rate of return increases. IV. the volatility of the price of the underlying stock increases.

intrinsic

The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option's _____ value.

-$60

Three months ago, you purchased a put option on WXX stock with a strike price of $60 and an option price of $.60. The option expires today when the value of WXX stock is $62.50. Ignoring trading costs and taxes, what is your total profit or loss on your investment?

-$60

Three months ago, you purchased a put option on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and taxes, what is your total profit or loss on your investment?

$25

Three weeks ago, you purchased a July 45 put option on RPJ stock at an option price of $3.20. The market price of RPJ stock three weeks ago was $42.70. Today, RPJ stock is selling at $44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put contract?

first have to compute the value of the put as if it is a call

To compute the value of a put using the Black-Scholes option pricing model, you:

$4.70

Tru-U stock is selling for $36 a share. A 3-month call on Tru-U stock with a strike price of $40 is priced at $1. Risk-free assets are currently returning 0.25% per month. What is the price of a 3-month put on Tru-U stock with a strike price of $40?

$3,300

What is the cost of five November 25 call option contracts on KNJ stock given the following price quotes?

$5.86

What is the intrinsic value of the August 25 call?

$6.69

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information? Stock price $48 Exercise price $45 Time to expiration .75 Risk-free rate .05 N(d1) .718891 N(d2) .641713

.4864

What is the value of d2 given the following information on a stock? Stock price $63 Exercise price $60 Time to expiration .50 Risk-free rate 6% Standard deviation 20% d1 .627841

$510

What is the value of one November 35 put contract?

the writer has the option to sell shares but not an obligation

Which of the following is not true concerning call option writers?

I and II only

Which of the following statements are correct concerning option values? I. The value of a call increases as the price of the underlying stock increases. II. The value of a call decreases as the exercise price increases. III. The value of a put increases as the price of the underlying stock increases. IV. The value of a put decreases as the exercise price increases.

american options may be exercised anytime up to expiration. european options may be exercised only at expiration

Which of the following statements is true?

both at expiration the maximum price of a call is the greater of (stock price-exercise) or 0; and at expiration the maximum price of a put is the greater of (exercise-stock price) or 0.

Which of the following statements is true?

american put

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

you have the right to buy at a set price at any time up to and including the expiration date

Which one of the following statements correctly describes your situation as the owner of an American call option?

lowering the risk level of the underlying security

Which one of the following will cause the value of a call to decrease?

sell a put and buy a call on a stock as well as invest at the risk-free rate of return

You can realize the same value as that derived from stock ownership if you:

$7.27

You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4%. Your option has a strike price of $20 and you assume that it will finish in the money. What is the current value of your call option?

$14.94

You own a call option on Jasper Co. stock that expires in one year. The exercise price is $42.50. The current price of the stock is $56.00 and the risk-free rate of return is 3.5%. Assume that the option will finish in the money. What is the current value of the call option?

finish out the money

You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:

$250

You own five put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

$0.76

You own one call option with an exercise price of $30 on Nadia Interiors 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% and the inflation rate is 3%. What is the current value of your option if it expires in one year?

call; $50,000

You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of ______

$0

You own two call option contracts on ABC stock with a strike price of $15. When you purchased the contracts the option price was $1.20 and the stock price was $15.90. What is the total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?

$1,304

You purchased four WXO 30 call option contracts at a quoted price of $.34. What is your net gain or loss on this investment if the price of WXO is $33.60 on the option expiration date?

$1,064

You purchased four WXO 32 call option contracts at a quoted price of $.34. What is your net gain or loss on this investment if the price of WXO is $35 on the option expiration date?

$360

You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30. The option expires today when the value of TJH stock is $41.90. Ignoring trading costs and taxes, what is your total profit or loss on your investment?

$600

You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $2. The option expires today when the value of TJH stock is $43. Ignoring trading costs and taxes, what is your total profit or loss on your investment?

-$60

You sold a put contract on EDF stock at an option price of $.40. The option had an exercise price of $20. The option was exercised. Today, EDF stock is selling for $19 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.

-$50

You sold a put contract on EDF stock at an option price of $.50. The option had an exercise price of $21. The option was exercised. Today, EDF stock is selling for $20 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.

$1,200

You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an option price of $1.20. Today, the option expires and the underlying stock is selling for $33 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?

$1,100

You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?

-$5,650

You wrote ten call option contracts on JIG stock with a strike price of $40 and an option price of $.40. What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?

-$4,450

You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60. What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?