Fin 533 final chapter 20

Determine the value of a call option on PJY inc shares at expiration if the market price of PJY is $33 and the exercise price is $35.

$0 This is an out-of-the-money call option that will expire worthless

Warrant

-they are often issued in conjunction with another security -there is a cash flow to the firm when the warrant is exercised -their exercised results in the creation of new shares

Options traded on exchanges

-they are standardized by allowable expiration dates and exercise prices -their uniformity increases market depth, lowers trading costs, and increases liquidity

An option that can be exercised before and up to its expiration date is called a(n) ________ option.

American

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

European

Longer-term options traded with expirations ranging up to several years are called

LEAPS

Which combination of securities constitutes a protective put?

Owning the stock and buying a put option

An investor who regularly writes naked, deep-out-of-the-money puts on an index would be expected to earn _____ gains and _____ losses,

a series of small, occasional large

Securities providing payoffs that depend on or are contingent on the values of other assets such as commodity prices, bond and stock prices, or market-index values are referred to as _______ securities.

derivative

The owner of a convertible bond typically has the right but not the obligation to

exchange the bonds for shares of stock

What are derivative securities?

futures, options, swaps

For a put option on a given security with a given expiration date, the value of the put is _____ when the exercise price is ______.

higher, higher lower, lower

An option whose exercise would produce a positive payoff is said to be _____.

in the money

A bond that has a call provision is one in which the

issuer can repurchase the bonds

For a call option on a given security with a given expiration date, the value of the call is ______ when the exercise price is _______.

lower, higher higher, lower

American options are ____ valuable than European options because they offer ______ flexibility regarding when the can be exercised.

more, more

A loan for which the lender cannot obtain payment beyond the collateral in event of default is a(n) _______ loan.

nonrecourse

The price paid for an option is referred to as its

premium

An investor who regularly writes covered calls on an asset receives ______ and gives up ______.

premiums, potentially large gains in the asset

The purpose of a straddle is to

profit from expected volatillity

The ____ of a call at expiration equals its ______ less its ______.

profit, payoff, premium

Which portfolios provide a payoff with a guaranteed minimum value and unlimited upside potential?

protective put, call and T-bills

The equation representing the equilibrium relationship between put and call prices is given by the

put-call-parity theorem

If an investor believes that a share of stock is overvalued, the investor might

sell a call, buy a put

A combination of two or more call options (or two or more puts) on the same stock with differing exercise prices or times to maturity is a(n)

spread

The combination of buying both a call and a put on the same asset, each with the same exercise price and expiration date is a(n)

straddle