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Finance > Chapter 20 > Flashcards

Chapter 20 Flashcards

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1
Q

Which of the following statements is false?
A) A call option gives the owner the right to buy the asset.
B) A put option gives the owner the right to sell the asset.
C) A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.

A

C

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2
Q

Which of the following statements is false?
A) When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price, he is exercising the option.
B) There are two kinds of options. European options allow their holders to exercise the option on any date up to and including a final date called the expiration date.
C) Because an option is a contract between two parties, for every owner of a financial option, there is also an option writer, the person who takes the other side of the contract.
D) The price at which the holder buys or sells the share of stock when the option is exercised is called the strike price or exercise price.

A

B

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3
Q

Which of the following statements is false?
A) The option buyer, also called the option holder, holds the right to exercise the option and has a long position
B) The market price of the option is also called the exercise price.
C) If the payoff from exercising an option immediately is positive, the option is said to be in-the-money. D) As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers.

A

B

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4
Q

Which of the following statements is false?
A) A holder would not exercise an in-the-money option.
B) The option seller, also called the option writer, sells (or writes) the option and has a short position in the contract.
C) Because the long side has the option to exercise, the short side has an obligation to fulfill the contract.
D) When the exercise price of an option is equal to the current price of the stock, the option is said to be at-the- money.

A

A

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5
Q

Which of the following statements is false?
A) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move.
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out of-the-money.
C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price.
D) European options allow their holders to exercise the option only on the expiration date holders cannot exercise before the expiration date.

A

C

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6
Q

The writer of a call option has
A) the obligation to sell a security for a given price.
B) the obligation to buy a security for a given price.
C) the right to sell a security for a given price.
D) the right to buy a security for a given price.

A

A

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7
Q

The holder of a put option has
A) the obligation to sell a security for a given price. B) the right to buy a security for a given price.
C) the right to sell a security for a given price.
D) the obligation to buy a security for a given price.

A

C

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8
Q

Using options to reduce risk is called A) speculation.
B) a naked position.
C) hedging.
D) a covered position.

A

C

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9
Q 
Using options to place a bet on the direction in which you believe the market is likely to move is called 
A) speculation.
B) hedging.
C) a covered position.
D) a naked position.
A

A

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10
Q 
An option strategy in which you hold a long position in both a put and a call option with the same strike price is called
A) a strangle.
B) portfolio insurance.
C) a butterfly spread. 
D) a straddle.
A

D

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11
Q

Which of the following statements is false?
A) Because a short position in an option is the other side of a long position, the profits from a short position in an option are just the negative of the profits of a long position.
B) The deeper out-of-the-money the put option is, the less negative its beta, and the higher is its expected return. C) Although payouts on a long position in an option contract are never negative, the profit from purchasing an option and holding it to expiration could well be negative because the payout at expiration might be less than the initial cost of the option.
D) The put position has a higher return in states with low stock prices; that is, if the stock has a positive beta, the put has a negative beta.

A

B

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12
Q 
Consider the following equation:
C = P + S - PV(K) - PV(Div)
In this equation the term S refers to A) the payoff of a zero coupon bond. B) the strike price of the option.
C) the value of the call option.
D) the stocks current price.
A

D

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13
Q 
Consider the following equation: C = P + S - PV(K) - PV(Div)
In this equation the term C refers to 
A) the value of the call option.
B) the stocks current price.
C) the payoff of a zero coupon bond. 
D) the strike price of the option.
A

A

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14
Q 
Consider the following equation: C = P + S - PV(K) - PV(Div)
In this equation the term K refers to 
A) the value of the call option.
B) the strike price of the option.
C) the price of a zero coupon bond. 
D) the stocks current price.
A

C

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15
Q

Which of the following statements is false?
A) Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond.
B) For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money.
C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher.
D) Because a put is the right to sell the stock, puts with a lower strike price are less valuable.

A

C

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16
Q

Which of the following statements is false?
A) The intrinsic value of an option is the value it would have if it expired immediately. B) A European option cannot be worth less than its American counterpart.
C) Put options increase in value as the stock price falls.
D) A put option cannot be worth more than its strike price.

A

B

17
Q

Which of the following statements is false?
A) Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value.
B) An American option with a later exercise date cannot be worth less than an otherwise identical American option with an earlier exercise date.
C) The value of an option generally decreases with the volatility of the stock.
D) The intrinsic value is the amount by which the option is currently in-the money or 0 if the option is out-of- the-money.

A

C

18
Q 
KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The intrinsic value of this put option is:
A) $0
B) -$2
C) $2
D) $30
A

A

19
Q 
KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The maximum value of this put option is:
A) $0
B) $32
C) $30
D) $2
A

C) maximum value for a put equals its strike price = $30

20
Q 
Consider the following equation:
C = S - K + dis(K) + P
In this equation, S - K tells us
A) the market value of the option.
B) the time value of the option.
C) the option spread.
D) the intrinsic value of the option.
A

D

21
Q

Consider the following equation: C = S - K + dis(K) + P - PV(Div)
In this equation, dis(K) + P - PV(Div) tells us
A) the market value of the option.
B) the difference in the price of an American option over a European option because of dividend capture.
C) the intrinsic value of the option.
D) the time value of the option.

A

D

22
Q

Which of the following statements is false?
A) An American call on a non-dividend-paying stock has the same price as its European counterpart.
B) The price of any call option on a non-dividend-paying stock always exceeds its intrinsic value.
C) It is never optimal to exercise a call option on a dividend-paying stock early you are always better off just selling the option.
D) If present value of the dividend payment is large enough, the time value of a European call option can be negative, implying that its price could be less than its intrinsic value.

A

C

23
Q

Which of the following statements is false?
A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the- money options.
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding.
C) In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy.
D) Because the price of equity is increasing with the volatility of the firm’s assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm’s assets.

A

B

24
Q

Which of the following statements is false?
A) If the value of the firm’s assets exceeds the required debt payment, debt holders are fully repaid.
B) Another way to view corporate debt: as a portfolio of riskless debt and a short position in a call option on the firm’s assets with a strike price equal to the required debt payment.
C) Viewing debt as an option portfolio is useful as it provides insight into how credit spreads for risky debt are determined.
D) You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment.

A

B

25
Q

A credit default swap is essentially a A) put option on the firm’s assets.
B) call option on the firm’s assets.
C) put option on the firm’s debt.
D) call option on the firm’s debt.

A

A

26
Q 
With a(n) \_\_\_\_\_\_\_\_, the buyer pays a premium to the seller and receives a payment from the seller to make up for the loss if the underlying bond defaults.
A) equity option swap 
B) credit default swap 
C) risk-free swap
D) interest rate swap
A

B

Finance (14 decks)

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