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Question
Bifive Homes, Inc., is a developer of planned residential communities. It has entered into an option contract with a land owner outside Austin, Texas. It will pay the land owner $100,000 for the option to buy the land in two years at a price of $20 million. During that time Bifive Homes will evaluate population and real estate trends in Austin. Its plan is to buy the land if real estate prices in Austin increase enough that developing the land would be worth more than the $20 million price. The $20 million purchase price resembles:A) the premium price of a put option on the land.
B) the premium price of a call option on the land.
C) the strike price of a put option on the land.
D) the strike price of a call option on the land.
Answer
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Related questions
Q:
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Q:
The standard deviation of the return on a stock is 25% per year. Compute the standard deviation over two years. (Round your intermediate answer to 3 decimal places.)A) 30.35%B) 35.35%C) 12.25%D) 25.00%
Q:
Consider a put option with a strike price of $40, which expires in one year. The risk-free rate of interest is 8 percent. The current underlying stock price is $20. Without arbitrage, which of the following is a possible price for the put option? (Round intermediate computations to two decimal places.)
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Q:
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Q:
Adding stock options and bonuses for performance to the compensation of a manager is intended to closer align the interest of the manager with:
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B) lenders.
C) employees.
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Q:
The claim lenders' hold on cash flows in a company with outstanding risky debt is often thought of as:
A) holding a call option on the firm's assets.
B) holding a put option on the firm's assets.
C) selling a put option on the firm's assets and holding a risk-free bond.
D) selling a call option on the firm's asset and holding a risk-free bond.
Q:
When the value of the firm is above the face value of the debt:
A) the stockholders repay the debt and the equity is worth less than $0.
B) the stockholders repay the debt and the equity is worth the difference between the firm value and the face value of the debt.
C) the stockholders default and the lenders receive the value of the firm.
D) the stockholders default and the equity is worth $0.
Q:
The management at PhoneUn considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If its new line of cars is poorly received, its plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles:
A) the premium of a put option on the plant.
B) the premium of a call option on the plant.
C) the strike price of a put option on the plant.
D) the strike price of a call option the plant.
Q:
What happens to the value of call and put options if the volatility of the price of underlying asset decreases?
A) Put options will be worth more, call options will be worth less.
B) Put options will be worth less, call options will be worth more.
C) Both call and put options will be worth more.
D) Both call and put options will be worth less.
Q:
Which of the following statements is true of a call option?
A) The value of a call option can never be positive.
B) The value of a call option can be more than the value of the underlying asset.
C) The value of a call option can never be worth less than the current value of the asset minus present value of the strike price.
D) The value of a call option can be worth more than the strike price.
Q:
Harmostrax Co. has a defined-benefit pension plan for its employees. To fund the plan, the company makes periodic contributions to a stock investment fund. If the stock market declines significantly, the company would have to make additional contributions to make up for lost revenue. The company could hedge its risk of a market downturn by periodically purchasing put options on the stock market.
A) True
B) False
Q:
After taking into account the value of real options, it is possible that some projects with a negative NPV should be pursued.
A) True
B) False
Q:
If a firm adds financial options to its debt securities, it will increase the interest expense to the firm.
A) True
B) False
Q:
Consider a call option on a stock with a strike price of $60. If the stock price at expiration is $50, the payoff from the call option is $10.
A) True
B) False
Q:
The current price of an asset is $75. A put option on the asset with a strike price of $100 expires one year from now. It is possible, without arbitrage, for this put option to be priced at $24 today.
A) True
B) False