Q&A Hero

Q: While the production of goods and services has become globalized, American consumers only purchase domestic goods. A) True B) False

Q: Globalization refers to the removal of barriers to free trade and the closer integration of national economies. A) True B) False

Q: What are agency costs in corporate finance, and how do they relate to options?

Q: You're brought in to consult on a project for Sanpharm Corp., which is considering whether or not to build a new high-tech manufacturing facility. Give four examples of real options that you would consider when evaluating the project.

Q: Name the factors that affect the value of a call option and explain the direction of the effects.

Q: Describe the difference between American call options and American put options. Include in your answer a description of the option premium, the option strike price, the expiration date, and the payoff function.

Q: Neunlay Inc., is a manufacturer of residential air conditioning equipment. Air conditioning equipment requires a lot of copper. In six months the company will purchase its copper supply for the next two years. Management is very concerned about the volatility of copper prices. Assume the risk-free rate of interest is 0 percent. Which of the following transactions will ensure the company does not have to pay more than $6,100 per ton of copper six months from now? A) The company purchases a put option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now. B) The company purchases a call option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now. C) The company sells a put option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton and an expiration date six months from now. D) The company sells a call option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now.

Q: Consider a lease agreement recently offered by a car dealership. The agreement gives the customer the right to use a new SUV for 4 years in exchange for payments of $650 per month. At the end of the lease, the customer can choose to purchase the SUV for $18,000. What sort of option does this resemble? A) A put option on the SUV with a strike price of $18,000 B) A call option on the SUV with a strike price of $18,000 C) A put option on the SUV with a strike price of $17,800 D) A call option on the SUV with a strike price of $17,800

Q: Consider a corn farmer who expects to produce 55,000 bushels of corn at the end of this season. To hedge the risk associated with corn prices, the farmer purchases put options to cover his entire crop. The put options have a strike price of $8.50 per bushel and a premium of $0.40 per bushel. He also sells an equal amount of call options with a strike price of $8.50 per bushel and a premium of $0.53 a bushel. Which of the following statements is correct? A) From this transaction the farmer can pocket $7,500 immediately. B) If corn prices go up substantially, the farmer will earn more money. C) The put options guarantee that the farmer will receive at least $7.63 per bushel at the end of the season. D) The farmer has guaranteed that he will sell his corn for $8.50 a bushel.

Q: Trerec Co. is a privately owned oil drilling and refinery company with a significant amount of debt. Most of the company's cash flows come from the financially stable refinery unit of the business. With only the assets in place, the company is very likely to avoid financial distress for the foreseeable future. Avoiding financial distress is very important to the owners, who founded the company. The company is considering a new oil drilling project, determined to have a positive NPV. Because of the nature of oil prices, the project is very risky. At any oil price above $115, the project would add value to the company. However, if oil prices were to fall below $95 the losses could push the entire business into financial distress. Assume the risk-free interest rate is 0 percent. Which of the following strategies would allow the firm to pursue the positive NPV project while hedging the oil price risk? A) The firm purchases call options with a strike price of $130 for each barrel of oil it expects to produce. Each option costs $6. B) The firm sells call options with a strike price of $130 on each barrel of oil it expects to produce. Each option costs $6. C) The firm purchases put options with a strike price of $130 on each barrel of oil it expects to produce. Each option costs $6. D) The firm sells put options with a strike price of $130 on each barrel of oil it expects to produce. Each option costs $6.

Q: Calculate the value of put option with the given information. Value of the call option is $6.2, Exercise price is $58, risk-free rate of interest is 5.5%, time before the option expires is one year and the current value of underlying assets is $52. Consider the value for "˜e" as 2.71828.A) $9.10B) $12.20C) $6.20D) $8.92

Q: Which of the following is true of a call option? A) The value of a call option must be less than or equal to $0. B) The value of a call option cannot be lower than the value of the underlying asset. C) The value of a call option prior to expiration will never be less than the value of the option if it were exercised immediately. D) A call option protects the seller from price volatility.

Q: When we consider the value of a call option at some time prior to expiration, we must: A) compare the current value of the underlying asset with the present value of the cash flow by underlying asset, discounted at the risk-free rate. B) compare the current value of the underlying asset with the present value of the exercise price, discounted at the risk-free rate. C) compare the current value of the underlying asset with the present value of the cash flow by underlying asset, discounted at the nominal rate. D) compare the current value of the underlying asset with the present value of the exercise price, compounded at the nominal rate.

Q: The value of call option can never be less than _____ A) $0 B) $1 C) strike price D) value of under lying asset

Q: Consider a call option and a put option both written on Neunlay, Inc. stock. Both options have a strike price of $20 and expire in one year. The stock of Neunlay, Inc., is currently selling for $20. In one month the stock will be at either $24 or $18. Assume the risk-free rate is 0 percent. Which is worth more, the put option or the call option?A) The put option is worth more.B) The call option is worth more.C) They are worth the same.D) There is not enough information.

Q: Consider two call options written on different stocks. Both call options have a strike price of $15 and expire one year from today. The first option is written on HearFour, Inc., whose current stock price is $16. One year from now, shares of HearFour will either rise to $18 or fall to $14. The second option is written on EsoOne, Inc., whose current stock price is also $16. One year from now shares of EsoOne Inc. will either rise to $22, or fall to $0. The risk-free interest rate is 0 percent. Which call option is worth more?A) The call option on HearFour, is worth more.B) The call option on EsoOne is worth more.C) They are both worth the same amount.D) There is not enough information to make a comparison.

Q: Assume that the stock of DiezEight, Inc., is currently trading for $16 and will either rise to $50 or fall to $2 in one year. The risk-free rate for one year is 8 percent. You own a portfolio that consists of one call option and one put option. Both options have a strike price of $15, and both expire in one year. What is the value of your portfolio? (Do not round intermediate computations. Round final answer to two decimal places.)A) $0B) $15.64C) $21.40D) $18.52

Q: Assume that the stock of ABC, Inc., is currently trading for $21 and will either rise to $30 or fall to $18 in one year. Assume the risk-free rate for one year is 0 percent. You own a portfolio that consists of one call option and one put option. Both options have a strike price of $25, and both expire in one year. What is the value of your portfolio? (Do not round intermediate computations. Round final answer to one decimal place.)A) $4.5B) $25.0C) $6.0D) $6.5

Q: Assume that the stock of EffeUn, Inc., is currently trading for $16 and will either rise to $18 or fall to $12 in one year. The risk-free rate for one year is 1 percent. What is the value of a put option with a strike price of $10? A) $0 B) $2.00 C) $2.33 D) $5.00

Q: You are fortunate enough to own a put option with a strike price of $40 on the stock of Osmerc, Inc. The current stock price is $3. When the option expires, you expect the stock price to be either $2 or $5. Assume the risk-free rate of interest is zero. What is the value of your option? A) $0 B) $35 C) $37 D) $46

Q: You own a share of common stock in Vibrapower, Inc., which is currently trading for $18 and will either rise to $30 or fall to $12 in one year. Assume the risk-free rate for one year is 0 percent. You also own an American put option on the stock with a strike price of $20, which expires in one year. What is the value of the put option, and what would be the net payoff from exercising the option now? (Do not round intermediate computations. Round final answer to two decimal places.)A) Option value: $3.33, Net payoff $2B) Option value: $3.33, Net payoff $6C) Option value: $5.33, Net payoff $2D) Option value: $5.33, Net payoff $6

Q: Assume that the stock of Statrec, Inc., is currently trading for $2.60 and will either rise to $10 or fall to $0 in one year. The risk-free rate for one year is 1 percent. What is the value of a put option with a strike price of $5? (Do not round intermediate computations. Round final answer to two decimal places.)A) $0B) $2.35C) $3.65D) $3.80

Q: If the value of the underlying asset is well above the exercise price of put option then: A) it is likely that the option will be exercised by the buyer. B) the exercise price remains constant irrespective of the change in the value of the underlying asset. C) the value of the option is directly proportional to the value of the underlying asset. D) the seller of the option will most likely make a profit.

Q: Assume that the stock of Mixtoss, Inc., is currently trading for $18 and will either rise to $30 or fall to $12 in one year. Assume the risk-free rate for one year is 0 percent. What is the value of a put option with a strike price of $15? (Do not round intermediate computations.)A) $0B) $2C) $5D) $6

Q: Assume that the stock of TuneSeis, Inc., is currently trading for $29 and will either rise to $32 or fall to $5 in one year. The risk-free rate for one year is 2 percent. What is the value of a put option with a strike price of $30? (Do not round intermediate computations. Round final answer to two decimal places.) A) $0 B) $0.41 C) $1.78 D) $2.20

Q: Assume that the stock of Phoneeffect, Inc., is currently trading for $16 and will either rise to $23.50 or fall to $9 in one year. The risk-free rate for one year is 3 percent. What is the value of a put option with a strike price of $18 that expires in three months? (Do not round intermediate computations. Round final answer to two decimal places.) A) $0 B) $2.75 C) $4.23 D) $5.73

Q: Assume that the stock of AllSiete, Inc., is currently trading for $44 and will either rise to $50 or fall to $29 in one year. The risk-free rate for one year is 4 percent. What is the value of a put option with a strike price of $40? (Round the final answer to two decimal places.) A) $0 B) $2.20 C) $3.14 D) $5.54

Q: Assume that the stock of Unmix, Inc., is currently trading for $22 and will either rise to $31 or fall to $18 in one year. Assume the risk-free rate for one year is 0 percent. What is the value of a put option with a strike price of $25? (Round the final answer to two decimal places.)A) $0B) $1.85C) $3.00D) $4.85

Q: Phocuscorp's stock is currently worth $60. The replicating portfolio consists of one-half share and $24.50 risk-free loan. Compute the value of call option. A) $5.5 B) $4.5 C) $5.0 D) $6.0

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: Assume that the stock of XYZ, Inc., is currently trading for $18 and will either rise to $24 or fall to $13 in one year. The risk-free rate for one year is 11 percent. What is the value of a call option with a strike price of $26? A) $0 B) $5.23 C) $7.72 D) $2.00

Q: XYZ, Inc., stock is currently trading for $47 and will either rise to $49 or fall to $44 in one year. The risk-free rate for one year is 6 percent. You own a call option with a strike price of $32, which expires in one year. What is the value of your call option? (Do not round intermediate computations. Round final answer to two decimal places.)A) $0B) $5.27C) $10.05D) $16.81

Q: Assume that the stock of Tencheck, Inc., is currently trading for $45 and will either rise to $57 or fall to $19 in one year. The risk-free rate for one year is 9 percent. What is the value of a call option with a strike price of $47? (Do not round intermediate computations. Round final answer to two decimal places.)A) $3.40B) $6.84C) $8.84D) $7.25

Q: Assume that the stock of Alitor Craft, Inc,. is currently trading for $19 and will either rise to $21 or fall to $15 in one year. The risk-free rate for one year is 12 percent. What is the value of a call option with a strike price of $16? (Do not round intermediate computations. Round final answer to two decimal places.)A) $4.67B) $2.33C) $1.04D) $6.83

Q: Tunerecord Unit Co. stock is currently trading at $24. There are two types of options available on the stock. Call options with a strike price of $24, which expire next year, are currently trading at $9.6. Put options with a strike price of $24, which expire next year, are currently trading for $2.4. Berniss invests $144 in common stock. Jewel invests $144 in the call options. Reynardo invests $144 in the put options. At the end of one year the price of Tunerecord Unit stock is $21.6. Who made the least losses off of their investment?A) BernissB) JewelC) ReynardoD) Berniss and Jewel tied

Q: Pitchgent, Inc., stock is currently trading at $22 per share. There are two types of options available on the stock. Call options with a strike price of $16, which expire next month, are currently trading at $7.00. Put options with a strike price of $16 which expire next month are currently trading at $1.10. Larry invests $132 in common stock. Keaty invests $132 in the call options. Marek invests $132 in the put options. At the end of one month, the price of Pitchgent, Inc., is $25. Who made the most money off of their investment? A) Larry B) Keaty C) Marek D) Larry and Keaty tied

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.) A) $0.50 B) $16.20 C) $25.00 D) $10.20

Q: Consider a call option with a strike price of $10, which expires in one year. The risk-free rate of interest is 10 percent. The current underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option? (Round intermediate computations to two decimal places.) A) $0 B) $19.50 C) $21.00 D) $19.00

Q: Consider a call option with a strike price of $20, which expires in one year. The risk-free rate of interest is 5 percent. The underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option? (Round intermediate computations to two decimal places.) A) $0 B) $8 C) $15 D) $1

Q: What is the payoff for a put option with a strike price of $22 if the price of the underlying stock at expiration is $19? A) $1 B) $3 C) $20 D) $22

Q: You have sold a call option on Ausia Co. stock with a strike price of $50. You do not intend to make any other transactions before the options expiration date. The current stock price is $30. Which of the following statements best describes your hopes for the stock? A) You want the stock price to fall below $30. B) You want the stock price to rise above $50. C) You are indifferent, as long as the stock price stays under $50. D) It doesn't matter; you are indifferent to changes in the stock price.

Q: You own a put option on Phosfranc Inc. stock with a strike price of $50. The current stock price is $50. In which of the following cases your benefit will increase? A) If the stock price goes up B) If the stock price goes down C) If the stock price stays the same D) Benefit is indifferent to the changes in the stock price.

Q: What is the payoff for the owner of a put option with a strike price of $63 if the underlying stock price at expiration is $43? A) $126 B) $43 C) $20 D) $63

Q: What is the payoff for the owner of a call option with a strike price of $35 if the underlying stock price at expiration is $30? A) $10 B) $20 C) $5 D) $0

Q: What is the payoff for a call option with a strike price of $50 if the underlying stock price at expiration is $85? A) $35 B) $50 C) $45 D) $140

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: A) stockholders. B) lenders. C) employees. D) public.

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: Which of the following statements is an example of the agency cost of debt? A) ABC Co. shareholders pressure management to invest in very risky projects in hopes that one of the investments might pay off. The company is highly leveraged, so shareholders have little to lose. B) ABC Co. has no debt but very few investment opportunities. The board of directors decides not to pay out a large special dividend. Lenders collect 100 percent of the face value of the debt. C) ABC Co. is financially sound. The company has a negative-NPV investment opportunity. Investors refuse to invest the additional funds necessary to pursue the project, as it has negative NPV. D) Investors are unsure of the value for ABC Co. ABC Co. decides to issue equity to pay down debt. The market assumes that ABC Co.'s managers are issuing equity because they think that the company's stock is overvalued. As a result, the company's stock price falls when the equity issue is announced.

Q: The claim stockholders hold on cash flows in a company with outstanding debt is often described as: A) a call option on the firm's assets. B) a put option on the firm's assets. C) an interest-free bond with the same value as the firm's assets. D) a put option on the firm's liabilities.

Q: 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.

Q: Anonxy Foods has made the decision to invest in a new line of organic microwave dinners. The new line of dinners is a negative-NPV project; paying its suppliers to convert to organic practices will be expensive. However, the company will be in a good position to expand into more profitable lines of food if consumer demand for organic foods grows more than expected. The negative value of the organic dinner project most closely resembles: A) the premium of a put option on future organic projects. B) the premium of a call option on future organic projects. C) the strike price of a put option on future organic projects. D) the strike price of a call option on future organic projects.

Q: The management at SevenglobeMotors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to easily be converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the extra cost of building the plant in such a way that it can easily be converted for other uses 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 on the plant.

Q: Purchasing a house is a somewhat complicated process. Typically, if the buyer's offer is accepted by the seller, the transaction will not be completed or "closed" for several weeks. During this time the buyer may gather more information about the house or research other houses in the area. Some home purchase contracts include an option fee. The buyer may pay the seller a few hundred dollars for the right to walk away from the contract prior to closing for any reason. This option fee is best described as: A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) a put option on the house.

Q: A local city government has awarded a contract to sequentially build five new elementary schools over the next 10 years. The price for each school has been spelled out in the contract, but at the beginning of each year the city can cancel the order for the remaining schools. The city government is concerned that if the population of the town does not grow as expected it may not need all of the schools. What sort of financial option does the option to cancel the order resemble? A) Owning a call option on the value of the new schools B) Owning a put option on the value of the new schools C) Selling a call option on the value of the new schools D) Selling a put option on the value of the new schools

Q: Consider a new firm that is working on the first generation of long-awaited consumer jet packs. The project will take a tremendous amount of R&D expenditure. Even if the development is successful, manufacturing the first generation of jet packs is likely to be so expensive that only a selected few consumers will be able to afford them. The projected sales of the first generation of jet packs almost certainly won't cover the development and manufacturing coststhe project has a negative NPV. Which of these reasons would validate the firm's decision to pursue the jet pack project? A) If development is unsuccessful, it can abandon the project before spending money on manufacturing. B) If the project is successful, it may lead to a very profitable second projecta cheaper jet pack that will be a positive-NPV project. C) Because it is a high-tech firm, the cash flows generated by a project are not important to valuing the company. D) If development is successful, it allows managers to reach wide range of consumers.

Q: Adosonic Reality is considering the construction of a new development of condominiums in downtown Austin, Texas. The site for the new development is currently occupied by an office building owned by the city. The project's profitability will depend largely on the population increase in Austin over the next several years. Rather than buy the site, Adosonic Reality has entered into an agreement with the city to pay $200,000 for the right to purchase the site for $10 million two years from now. The real option embedded in this contract is best described as: A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) the option to abandon projects.

Q: The employment contracts for professional athletes often contain options for either the player or the team. Consider one recent contract in Major League Baseball. The player's salary was guaranteed for the first couple of years. However, after several years, the team had the option to cancel the contract if the player became injured. If we think of each player as a project for the team, this option feature of the contract is best described as: A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) the option to abandon projects.

Q: Arctic Inc. has built a highly interactive operating system for mobile and other electronic gadgets. The development cost to the company was high but the system was inexpensive to sustain and market. The NPV of this project was negative. However, in the coming years the company plans to launch mobile phones, portable audio and video devices. The decision of launching the operating system for mobile and other devices is an example of: A) option to defer investment. B) option to abandon a project. C) option to change operations. D) option to make follow-on investments.

Q: As the manager of a sporting goods company, you are presented with a new golf project. An inventor has recently patented the design for a new golf club that makes playing golf much easier. Your company has made contact with the inventor, who is willing to sell the exclusive rights to the technology, but if you don't act fast he will sell the rights to a rival company. You are not certain whether the new golf club will become popular, but your analysts have completed a basic NPV analysis. Given the available information, the project has a positive NPV. However, you know there are several real options associated with the project, including the option to abandon the project and the option to make follow-on investments. Which of the following statements regarding the project is correct? A) Based on the NPV analysis, you should accept the project. The value of the project may be worth more than the NPV analysis but not less. B) Based on the NPV analysis, you should accept the project. The NPV analysis contains all the information about the value of the project. C) Based on the NPV analysis, you should reject the project. Without additional information about the value of the real options, there is no way to make a decision. D) Based on the NPV analysis, you should reject the project. The NPV analysis contains all the information about the value of the project.

Q: Which of the following is a valid reason for managers selecting projects with negative NPV? A) The NPV analysis includes a valuable real option to expand the project if things go well. B) If a firm has debt, managers may create value for shareholders by taking on some risky negative NPV projects. C) Managers' payoff functions represent the payoffs of lenders. By taking negative NPV projects, the managers can create value for lenders. D) Projects having negative NPV can have high internal rate of return.

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: Consider a CEO who holds neither stock nor stock options in the company she runs. Her payoff function regarding the firm's performance is most likely to resemble: A) stockholders. B) lenders. C) owners of a call option on the firm. D) holders of a risk-free bond with coupon payments equal to her salary.

Q: When a company issues convertible bonds with a $1,000 par value that can be converted to 20 shares of common stock, each bond includes:A) a put option with an exercise price of $200 per share.B) a call option with an exercise price of $50 per share.C) a put option with an exercise price of $20 per share.D) a call option with an exercise price of $20 per share

Q: Why would the managers of a firm bundle options with stock in an IPO? A) To increase the supply of outstanding shares in order to attract more investors B) To promote the dilution of common stockholders' control on assets C) To reduce the number of common shares that must be sold at the IPO price in order to raise the amount of money that the firm needs D) To bring down the earnings per share of common stockholders

Q: Frost1 Motors is very likely to enter financial distress. Without a dramatic change of events over the next couple of years, the company will be unable to pay its lenders, who will then gain control of the company's assets. A group of stockholders has pressured the company's management to begin manufacturing and selling one of the company's concept cars in the hope that it will be a big hit. Concept cars are prototypes that are developed to test new ideas and to show off at auto shows. Although elements of concept cars are often incorporated into product lines, rushing a concept car into production is very risky. The best estimates about the concept car make it appear to be a negative-NPV project. This is a good example of: A) the dividend payout problem. B) the underinvestment problem. C) the asset substitution problem. D) the agency cost of equity.

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: With everything else held constant, what happens to the value of call and put options if the risk-free interest rate increases? A) Call options will be worth more, put options will be worth less. B) Call options will be worth less, put options will be worth more. C) Both call and put options will be worth less. D) Both call and put options will be worth more.

Q: With everything else constant, as the expiration date gets closer, what happens to the value of call and put options? A) Call option will be worth more, put options will be worth less. B) Call option will be worth less, put 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: If the price of the underlying asset increases, what happens to the value of call and put options? 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: 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 changes, when considered individually, will increase the value of a put option? A) An increase in the risk-free interest rate B) Lower volatility of the price of the underlying asset C) A higher strike price D) The option is nearing its expiration date.

Q: Which of the following changes, when considered individually, will increase the value of a call option? A) The value of the underlying asset becomes more volatile B) The price of the underlying asset goes down C) Getting closer to the expiration date (the passage of time) D) A higher strike price

Q: The option payoff function is the relationship: A) between the value of an option and the value of a firm. B) between the value of an option and the price of the underlying asset. C) between the call premium and the value of an option. D) between the call premium and the price of underlying asset.

Q: Consider an American and a European call option on a dividend-paying stock, with otherwise identical features (same strike price, etc.). Which of the following statements is true? A) The American call option will never be worth less than the European call option. B) The European call option will never be worth less than the American call option. C) Both European call and American call option should always have the same value. D) The American option can be exercised only on specific dates during the life of the option.

Q: Consider an option that gives the owner the right to buy a stock for $20 only on the third Friday of May, next year. The option being described is: A) an American call option. B) a European put option. C) an American put option. D) a European call option.

Q: Suppose you own a put option on a stock with a strike price of $35 that expires today. The price of the underlying stock is $25. If you purchase the stock and exercise the put option: A) you will earn $10. B) you will lose $10. C) you will earn $25. D) you will lose $25.

Q: Suppose you own a call option on a stock with a strike price of $20 that expires today. The price of the underlying stock is $15. If you exercise the option and immediately sell the stock: A) you will earn $5. B) you will lose $5. C) you will lose $15. D) you will earn $15.

Q: Which of the following statements is true of a put option? A) The value of a put option can be negative. B) The value of a put option can be worth more than the underlying asset. C) The value of a put option can be less than the present value of the strike price minus the current value of the underlying asset. D) The value of a put option increases when the stock price increases.

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: An investor (the buyer) purchases a put option from a seller. On the expiration date of a put option: A) the buyer has the obligation to sell the underlying asset and the seller has the right to buy it. B) the buyer has the obligation to sell the underlying asset and the seller has the obligation to buy it. C) the buyer has the right to sell the underlying asset and the seller has the obligation to buy it. D) the buyer has the right to buy the underlying asset and the seller has the right to sell it.