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1. Which of the following
statements is CORRECT?
a. Put options give investors the
right to buy a stock at a certain strike price before a specified date.
b. Call options give investors
the right to sell a stock at a certain strike price before a specified date.
c. Options typically sell for
less than their exercise value.
d. LEAPS are very short-term
options that were created relatively recently and now trade in the market.
e. An option holder is not
entitled to receive dividends unless he or she exercises their option before
the stock goes ex dividend.
2. Which of the following
statements is CORRECT?
a. If the underlying stock does
not pay a dividend, it makes good economic sense to exercise a call option as
soon as the stock’s price exceeds the strike price by about 10%, because this
permits the option holder to lock in an immediate profit.
b. Call options generally sell at
a price less than their exercise value.
c. If a stock becomes riskier
(more volatile), call options on the stock are likely to decline in value.
d. Call options generally sell at
prices above their exercise value, but for an in-the-money option, the greater
the exercise value in relation to the strike price, the lower the premium on
the option is likely to be.
e. Because of the put-call parity
relationship, under equilibrium conditions a put option on a stock must sell at
exactly the same price as a call option on the stock.
3. Which of the following
statements is CORRECT?
a. An option's value is
determined by its exercise value, which is the market price of the stock less
its striking price. Thus, an option can't sell for more than its exercise
value.
b. As the stock’s price rises,
the time value portion of an option on a stock increases because the difference
between the price of the stock and the fixed strike price increases.
c. Issuing options provides
companies with a low cost method of raising capital.
d. The market value of an option
depends in part on the option's time to maturity and also on the variability of
the underlying stock's price.
e. The potential loss on an
option decreases as the option sells at higher and higher prices because the
profit margin gets bigger.
4. The current price of a stock
is $22, and at the end of one year its price will be either $27 or $17. The
annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option
on the stock, with an exercise price of $22, is available. Based on the
binominal model, what is the option's value?
a. $2.43
b. $2.70
c. $2.99
d. $3.29
e. $3.62
5. An analyst wants to use the
Black-Scholes model to value call options on the stock of Ledbetter Inc. based
on the following data:
The price of the stock is $40.
The strike price of the option is
$40.
The option matures in 3 months (t
= 0.25).
The standard deviation of the
stock’s returns is 0.40, and the variance is 0.16.
The risk-free rate is 6%.
Given this information, the
analyst then calculated the following necessary components of the Black-Scholes
model:
d1 = 0.175
d2 = -0.025
N(d1) = 0.56946
N(d2) = 0.49003
N(d1) and N(d2) represent areas
under a standard normal distribution function. Using the Black- Scholes model,
what is the value of the call option?
a. $2.81
b. $3.12
c. $3.47
d. $3.82
e. $4.20
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