Question 1

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.2 million. Over the past five years, the price of land in the area has increased 10 percent per year, with an annual standard deviation of 23 percent. A buyer has recently approached you and wants an option to buy the land in the next 9 months for $1,310,000. The risk-free rate of interest is 7 percent per year, compounded continuously. How much should you charge for the option? (Round your answer to the nearest $1,000.)

Accepted Answer

A)  $52,000
B)  $58,000
C)  $63,000
D)  $72,000
E)  $77,000F) A) and D)
G) B) and D)

Question 2

Which one of the following statements related to options is correct?

Accepted Answer

A)  American stock options can be exercised but not resold.
B)  A European call is either equal to or less valuable than a comparable American call.
C)  European puts can be resold but can never be exercised.
D)  European options can be exercised on any dividend payment date.
E)  American options are valued using the Black-Scholes option pricing model.F) A) and C)
G) None of the above

Question 3

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Accepted Answer

A)  equal to one.
B)  between zero and one.
C)  equal to zero.
D)  between zero and minus one.
E)  equal to minus one.F) A) and E)
G) B) and D)

Question 4

Which of the following statements are correct?
I. Increasing the time to maturity may not increase the value of a European put.
II. Vega measures the sensitivity of an option's value to the passage of time.
III. Call options tend to be more sensitive to the passage of time than are put options.
IV. An increase in time decreases the value of a call option.

Accepted Answer

A)  I and III only
B)  II and IV only
C)  II, III, and IV only
D)  I, III, and IV only
E)  I, II, III, and IVF) A) and B)
G) All of the above

Question 5

Explain why financial mergers tend to benefit bondholders more than shareholders.

Accepted Answer

Financial mergers tend to lower the risk...

Question 6

Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to the strategy Travis is using?

Accepted Answer

A)  put-call parity
B)  covered call
C)  protective put
D)  straddle
E)  strangleF) A) and B)
G) A) and E)

Question 7

Which of the following variables are included in the Black-Scholes call option pricing formula?
I. put premium
II. N(d1) 
III. exercise price
IV. stock price

Accepted Answer

A)  III and IV only
B)  I, II, and IV only
C)  II, III, and IV only
D)  I, III, and IV only
E)  I, II, III, and IVF) A) and E)
G) B) and C)

Question 8

Theta measures an option's:

Accepted Answer

A)  intrinsic value.
B)  volatility.
C)  rate of time decay.
D)  sensitivity to changes in the value of the underlying asset.
E)  sensitivity to risk-free rate changes.F) B) and E)
G) B) and D) C

Question 9

You need $12,000 in 6 years. How much will you need to deposit today if you can earn 11 percent per year, compounded continuously? Assume this is the only deposit you make.

Accepted Answer

A)  $6,000.00
B)  $6,048.50
C)  $6,179.25
D)  $6,202.22
E)  $6,415.69F) C) and E)
G) D) and E)

Question 10

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Accepted Answer

An increase in the risk-free rate will increase the value of an American call option and decrease the value of an American put option. However, any change in the option value will be somewhat limited given a normal range of market interest rates.

Question 11

J&N, Inc. stock has a current market price of $46 a share. The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24. What is the risk-free rate of return?

Accepted Answer

A)  1.49 percent
B)  1.82 percent
C)  3.10 percent
D)  3.64 percent
E)  4.21 percentF) A) and C)
G) B) and E)

Question 12

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Accepted Answer

A)  purchasing a put option
B)  purchasing a call option
C)  exercising an in-the-money put option
D)  exercising an in-the-money call option
E)  selling a call optionF) A) and B)
G) A) and C)

Question 13

Which one of the following statements is correct?

Accepted Answer

A)  The price of an American put is equal to the stock price minus the exercise price.
B)  The value of a European call is greater than the value of a comparable American call.
C)  The value of a put is equal to one minus the value of an equivalent call.
D)  The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price.
E)  The value of an American put will equal or exceed the value of a comparable European put.F) B) and D)
G) A) and E)

Question 14

A call option with an exercise price of $31 and 6 months to expiration has a price of $3.77. The stock is currently priced at $17.99, and the risk-free rate is 3 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date?

Accepted Answer

A)  $13.89
B)  $14.57
C)  $15.24
D)  $15.69
E)  $16.32F) All of the above
G) A) and C)

Question 15

The implied standard deviation used in the Black-Scholes option pricing model is:

Accepted Answer

A)  based on historical performance.
B)  a prediction of the volatility of the return on the underlying asset over the life of the option.
C)  a measure of the time decay of an option.
D)  an estimate of the future value of an option given a strike price (
E)  .
E)  a measure of the historical intrinsic value of an option.F) B) and D)
G) D) and E)

Question 16

Give an example of a protective put and explain how this strategy reduces investor risk.

Accepted Answer

Students should give an example that inc...

Question 17

The current market value of the assets of Nano Tek is $16 million. The market value of the equity is $7.5 million. The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years. What is the market value of the firm's debt?

Accepted Answer

A)  $8.50 million
B)  $9.98 million
C)  $12.00 million
D)  $19.42 million
E)  $23.84 millionF) All of the above
G) A) and B)

Question 18

What is the price of a put option given the following information?

Accepted Answer

A)  $16.57
B)  $16.83
C)  $17.74
D)  $18.47
E)  $19.02F) C) and D)
G) C) and E)

Question 19

A call option matures in nine months. The underlying stock price is $95, and the stock's return has a standard deviation of 19 percent per year. The risk-free rate is 3 percent per year, compounded continuously. The exercise price is $0. What is the price of the call option?

Accepted Answer

A)  $15.97
B)  $52.14
C)  $56.37
D)  $92.23
E)  $95.00F) A) and B)
G) A) and C)

Question 20

Cell Tower stock has a current market price of $62 a share. The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69. What is the risk-free rate of return?

Accepted Answer

A)  3.95 percent
B)  4.21 percent
C)  4.67 percent
D)  5.38 percent
E)  5.57 percentF) A) and D)
G) A) and C) A

Exam 25: Option Valuation

Correct Answer
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Which one of the following statements related to options is correct?

Correct Answer
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The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Correct Answer
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Correct Answer
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Explain why financial mergers tend to benefit bondholders more than shareholders.

Correct Answer
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Financial mergers tend to lower the risk...
View Answer

Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to the strategy Travis is using?

Correct Answer
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Which of the following variables are included in the Black-Scholes call option pricing formula? I. put premium II. N(d₁) III. exercise price IV. stock price

Correct Answer
verified

Theta measures an option's:

Correct Answer
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C

You need $12,000 in 6 years. How much will you need to deposit today if you can earn 11 percent per year, compounded continuously? Assume this is the only deposit you make.

Correct Answer
verified

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Correct Answer
verified
An increase in the risk-free rate will increase the value of an American call option and decrease the value of an American put option. However, any change in the option value will be somewhat limited given a normal range of market interest rates.

J&N, Inc. stock has a current market price of $46 a share. The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24. What is the risk-free rate of return?

Correct Answer
verified

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Correct Answer
verified

Which one of the following statements is correct?

Correct Answer
verified

A call option with an exercise price of $31 and 6 months to expiration has a price of $3.77. The stock is currently priced at $17.99, and the risk-free rate is 3 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date?

Correct Answer
verified

The implied standard deviation used in the Black-Scholes option pricing model is:

Correct Answer
verified

Give an example of a protective put and explain how this strategy reduces investor risk.

Correct Answer
verified
Students should give an example that inc...
View Answer

The current market value of the assets of Nano Tek is $16 million. The market value of the equity is $7.5 million. The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years. What is the market value of the firm's debt?

Correct Answer
verified

What is the price of a put option given the following information?

Correct Answer
verified

A call option matures in nine months. The underlying stock price is $95, and the stock's return has a standard deviation of 19 percent per year. The risk-free rate is 3 percent per year, compounded continuously. The exercise price is $0. What is the price of the call option?

Correct Answer
verified

Cell Tower stock has a current market price of $62 a share. The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69. What is the risk-free rate of return?

Correct Answer
verified
A

Exam 25: Option Valuation

Correct AnswerverifiedShow Answer

Which one of the following statements related to options is correct?

Correct AnswerverifiedShow Answer

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Explain why financial mergers tend to benefit bondholders more than shareholders.

Correct AnswerverifiedFinancial mergers tend to lower the risk...View AnswerShow Answer

Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to the strategy Travis is using?

Correct AnswerverifiedShow Answer

Which of the following variables are included in the Black-Scholes call option pricing formula? I. put premium II. N(d1) III. exercise price IV. stock price

Correct AnswerverifiedShow Answer

Theta measures an option's:

Correct AnswerverifiedC

You need $12,000 in 6 years. How much will you need to deposit today if you can earn 11 percent per year, compounded continuously? Assume this is the only deposit you make.

Correct AnswerverifiedShow Answer

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Correct AnswerverifiedAn increase in the risk-free rate will increase the value of an American call option and decrease the value of an American put option. However, any change in the option value will be somewhat limited given a normal range of market interest rates.

J&N, Inc. stock has a current market price of $46 a share. The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24. What is the risk-free rate of return?

Correct AnswerverifiedShow Answer

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

A call option with an exercise price of $31 and 6 months to expiration has a price of $3.77. The stock is currently priced at $17.99, and the risk-free rate is 3 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date?

Correct AnswerverifiedShow Answer

The implied standard deviation used in the Black-Scholes option pricing model is:

Correct AnswerverifiedShow Answer

Give an example of a protective put and explain how this strategy reduces investor risk.

Correct AnswerverifiedStudents should give an example that inc...View AnswerShow Answer

The current market value of the assets of Nano Tek is $16 million. The market value of the equity is $7.5 million. The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years. What is the market value of the firm's debt?

Correct AnswerverifiedShow Answer

What is the price of a put option given the following information?

Correct AnswerverifiedShow Answer

A call option matures in nine months. The underlying stock price is $95, and the stock's return has a standard deviation of 19 percent per year. The risk-free rate is 3 percent per year, compounded continuously. The exercise price is $0. What is the price of the call option?

Correct AnswerverifiedShow Answer

Cell Tower stock has a current market price of $62 a share. The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69. What is the risk-free rate of return?

Correct AnswerverifiedA

Correct Answer
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Correct Answer
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Financial mergers tend to lower the risk...
View Answer

Correct Answer
verified

Which of the following variables are included in the Black-Scholes call option pricing formula? I. put premium II. N(d₁) III. exercise price IV. stock price

Correct Answer
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Correct Answer
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C

Correct Answer
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Correct Answer
verified
An increase in the risk-free rate will increase the value of an American call option and decrease the value of an American put option. However, any change in the option value will be somewhat limited given a normal range of market interest rates.

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Students should give an example that inc...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A