401 Test 1

Question 1

Increase to stock price

Answer 1

Increase call, decrease put

Question 2

Increase strike price

Answer 2

Decrease call, increase put

Question 3

Increase time to expiration

Answer 3

Increase call, unknown for put

Question 4

Increase Rrf

Answer 4

Increase call, decrease put

Question 5

Increase variance

Answer 5

Increase call, increase put

Question 6

Binomial method

Answer 6

1. Payoff
2. Ns= Cu - Cd / Pu - Pd
3. FV = Ns (Pu) - Payoff
4. PV *N = 365
5. PV = NsP - Vc

Question 7

Binomial put

Answer 7

Vc - P + X / (1+rf/365)^365*t

Question 8

Exercise value

Answer 8

Price - Strike

Question 9

Time Value

Answer 9

Option - exercise value

Question 10

Ways risk management can affect value of a firm

Answer 10

• increase debt capacity
• optimal capital budget
• increase FCF
• hedging (swaps)
• minimize negative tax effects
• interest rate swaps

Question 11

Future vs. forward

Answer 11

Future: standardized, marking-to-market

Forward: customized, delivery date, less liquid

Question 12

Working capital investment policies

Answer 12

Relaxed: increase CA investment
Moderate
Restricted: lower CA investment

Question 13

Working capital financing policies

Answer 13

Moderate: perm and fixed use long term
Temp use short term

Aggressive: more short term

Conservative: more long term

Question 14

Short term vs. long term debt

Answer 14

• low cost yield curve
• get funds quick
• repay w/o penalty

Disadvantage:

Higher risk

Question 15

Short term financing

Answer 15

Accruals: free, but no control

Trade credit: spontaneous, easy, high cost

Commercial Paper

Question 16

Trade credit cost

Answer 16

EAR = (1 + periodic rate) ^ n - 1

Question 17

BDL

Answer 17

BDL x Sales

Question 18

Discount

Answer 18

Discount x (1- BDL) x customers x sales

Question 19

Discount EAR

Answer 19

Interest pymt / usable funds