Q&A Hero

Q: If you have loaned capital to a firm, then you could be A) a manager. B) a stakeholder. C) a partner. D) all of the above.

Q: A stakeholder is: A) someone geographically close to the firm's headquarters. B) someone who has a claim on the cash flows of the firm. C) some government agency. D) all of the above.

Q: To start a business, the owners need A) a market where there is demand for their product. B) a clear vision of what products or services they want to produce. C) the know-how to successfully market their product. D) all of the above.

Q: Corruption in business does not affect the growth of the financial markets. A) True B) False

Q: The owners of a firm are unaffected by agency costs. A) True B) False

Q: An agency conflict can arise when the agent of the firm is the sole owner of the firm. A) True B) False

Q: Maximizing revenue should be the goal of the firm. A) True B) False

Q: The external auditors of the firm report their findings directly to the CFO of the firm. A) True B) False

Q: The treasurer of a corporation usually reports to the CFO of the firm. A) True B) False

Q: Privately held corporations are allowed to have stockholders. A) True B) False

Q: C-Corporations do not have their income subject to double taxation. A) True B) False

Q: General partners in a business have limited liability with regard to their firm's obligations. A) True B) False

Q: The process of transferring ownership of a sole proprietorship is relatively easy compared to a public corporation. A) True B) False

Q: Unlimited liability means that the owner of a firm is responsible for paying all the bills of the firm. A) True B) False

Q: Corporations hold the majority of all business assets and generate the majority of business revenues and profits in the United States. A) True B) False

Q: A sole proprietorship is an owner's only business. A) True B) False

Q: The dollar difference between a firm's total current assets and total liabilities is called its net working capital. A) True B) False

Q: Financing decisions determine how firms raise cash to pay for their investments. A) True B) False

Q: A good capital budgeting or investment decision is one in which the benefits are worth more to the firm than the cost of the asset. A) True B) False

Q: Capital assets are generally short term in nature. A) True B) False

Q: When a firm goes bankrupt, it will always be liquidated. A) True B) False

Q: The most fundamental way that a business can grow in size is the reinvestment of cash flows or earnings. A) True B) False

Q: Intangible assets generate most of a manufacturing firm's cash flows. A) True B) False

Q: A patent is a productive asset for a technology-based firm. A) True B) False

Q: The financial manager is responsible for making decisions that are in the best interests of the firm's owners. A) True B) False

Q: What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

Q: Assume that the current price of FGX stock is $33, that a 6 month call option on the stock has a strike or exercise price of $35.00, the risk free rate is 4%, and that you have calculated N(d1) as .65 and N(d2) as .55. Use the Black-Scholes model to calculate the price of the option.

Q: Assume that the current price of FGX stock is $35, that a 6 month call option on the stock has a strike or exercise price of $33.00, the risk free rate is 4%, and that you have calculated N(d1) as .65 and N(d2) as .55. Use the Black-Scholes model to calculate the price of the option.

Q: One of the most popular swaps is the interest rate swap.

Q: A swap is generally structured so that no money initially changes hands.

Q: Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods than options and futures contracts.

Q: As the length of time left until expiration increases, the value of call and put options on the stock also increases.

Q: As the volatility of a stock's price increases, the value of call and put options on the stock decreases.

Q: Futures and currency swaps eliminate unfavorable price movements, whereas options can be used to eliminate the effect of both favorable and unfavorable price movements.

Q: Which of the following is a vehicle for controlling exchange rate risk? A) The purchase of a cross-rate index B) The purchase of a LEAP C) The purchase of a spot-rate index D) A currency swap

Q: A firm agrees to accept annual payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the annual payments on a loan with floating rate payments based on LIBOR. Payments are interest only with principal due in 10 years. If LIBOR falls to 7%, the firm's net cash flow will be: A) $70,000. B) ($10,000). C) $10,000. D) $80,000.

Q: A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR. Payments are interest only with principal due in 10 years. The firm will benefit: A) if LIBOR falls. B) if LIBOR rises . C) if Libor remains unchanged. D) if LiIBOR fluctuates randomly.

Q: When a party enters into a swap contract it agrees to: A) accept one set of payments in exchange for another. B) exchange principals on loans with different interest rates. C) exchange a loan for a different loan with a different time to maturity. D) swap a debt obligation for an equity obligation.

Q: Use the following information to answer the following question(s). Valuing a call option using the Black Scholes model Current price of of ABZ stock = $50 Exercise or strike price of the call option = $48 The maturity of the option is 0.5 years The annualized variance in the returns on the stock is .20 The risk free rate of interest is 3% per annum Assume that N(d1) =.63105andN(d2)= .50735. Compute the value of the call option using the Black -Scholes option pricing model. A) $23.99 B) $7.56 C) $7.20 D) $2.00

Q: Use the following information to answer the following question(s). Valuing a call option using the Black Scholes model Current price of of ABZ stock = $50 Exercise or strike price of the call option = $48 The maturity of the option is 0.5 years The annualized variance in the returns on the stock is .20 The risk free rate of interest is 3% per annum What is the value of d2 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model. A) .33464 B) .07483 C) .40822 D) .01842

Q: Use the following information to answer the following question(s). Valuing a call option using the Black Scholes model Current price of of ABZ stock = $50 Exercise or strike price of the call option = $48 The maturity of the option is 0.5 years The annualized variance in the returns on the stock is .20 The risk free rate of interest is 3% per annum What is the value of d1 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model. A) .33464 B) .07483 C) .40822 D) .01842

Q: Assume that the current price of DEY stock is $25, that a 1 year call option on the stock has a strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option. A) $1.74 B) $4.20 C) 1.98 D) $2.50

Q: Assume that the current price of DEY stock is $27.50, that a 6 month call option on the stock has a strike or exercise price of $25.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option. A) $1.74 B) $4.20 C) 1.98 D) ($2.50)

Q: Assume that the current price of DEY stock is $25, that a 6 month call option on the stock has a strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option. A) $1.74 B) $4.20 C) 1.98 D) $2.50

Q: The greater a firm's dividend payout, the ________ likely it is that the stock's price will rise above the exercise price. A) less B) more C) dividends have no effect on the stock's future price D) the answer depends on the risk-free rate.

Q: As the risk free rate of return increases, the value of call options ________ and the value of put options ________. A) decreases, increases B) increases, increases C) decreases, decreases D) increases, decreases

Q: As the volatility of a stock's price increases, the value of call options ________ and the value of put options ________. A) decreases, increases B) increases, increases C) decreases, decreases D) increases, decreases

Q: Which of the following variables is NOT part of the Black-Scholes option pricing model? A) The expected rate of return on the market B) The current stock price C) The strike price or exercise price D) The time remaining before the expiration date

Q: Annika has purchased put options on 1000 shares of Amazon stock with a striking price of $170 per share. The option premium was $6.00 per share. a. Compute Annika's profit or loss if the market value of Amazon's stock is $180 at expiration. b. Compute Annika's profit or loss if the market value of Amazon's stock is $160 at expiration. c. Compute Annika's profit or loss if the market value of Amazon's stock is $172 at expiration.

Q: Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of $170 per share. The option premium was $4.00 per share. a. Compute Jorge's profit or loss if the market value of Amazon's stock is $180 at expiration. b. Compute Jorge's profit or loss if the market value of Amazon's stock is $160 at expiration. c. Compute Jorge's profit or loss if the market value of Amazon's stock is $172 at expiration.

Q: What are the rights and obligations of the buyer and the seller of a call option on common stock?

Q: What are the differences between forward contracts and futures contracts? What are some advantages and disadvantages of each.

Q: The most you can ever lose when you purchase a put or call option is the premium.

Q: If a call option's exercise price is above the stock price, then the option's intrinsic value is zero.

Q: Open interest provides the investor with some indication of the amount of liquidity associated with a particular option.

Q: An American option can be exercised only on the expiration date.

Q: The margin on a futures contract refers to the amount of equity the investor initially paid to purchase the futures contract.

Q: A futures contract is a specialized form of a forward contract distinguished by an organized exchange which encourages confidence in the futures market by allowing for the effective regulation of trading.

Q: An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period.

Q: The seller of an option keeps the option premium regardless of whether or not the option is ever exercised.

Q: A call option gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period.

Q: There is no actual buying or selling that occurs with a futures contract.

Q: There is only one day per month on which a listed option on any stock can expire.

Q: Options contracts all expire on the last trading day of the month.

Q: European and American are different types of stock options and have nothing to do with where the options are bought and sold.

Q: A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period.

Q: If you expect a stock's price to drop, it would be better to sell a call on that stock than to sell a put on it.

Q: Options can only be purchased for individual stocks, not for funds or indexes.

Q: The difference between a stock's current price and the striking price of the option is the minimum value of the option.

Q: If you expect a stock's price to rise, it would be better to purchase a call on that stock than to purchase a put on it.

Q: A(n) ________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future. A) warrant B) option C) future D) convertible contract

Q: A(n)________ is a financial instrument that can be used to eliminate the effect of both favorable and unfavorable price movements. A) convertible securities B) call option C) put option D) futures contracts

Q: The popularity of options can be explained by the use of options: A) in writing future contracts. B) as a type of financial insurance. C) to expand the set of possible investment alternatives available. D) both B and C. E) all of the above.

Q: The term open interest refers to the: A) total amount of interest paid on an options margin account. B) number of option contracts in existence at a point in time. C) interest accumulated on a Treasury bond contract. D) striking price of an interest rate swap.

Q: The striking price is the: A) price paid for the option. B) price at which the stock or asset may be purchased from the writer. C) minimum value of the option. D) premium minus the exercise price.

Q: The term futures margin refers to: A) the percent of potential margin for profit associated with a futures contract. B) the "good faith" money the purchaser puts down to ensure that the contract will be carried out. C) the interest-earning account associated with a futures contract. D) the number of contracts outstanding on a particular futures contract.

Q: A futures contract is a specialized form of a forward contract distinguished by a(n): A) organized exchange. B) standardized contract with unlimited price changes and margin requirements. C) clearinghouse in each futures market. D) both A and C.

Q: The owner of a large, diversified stock portfolio could hedge against a steep decline in prices by: A) buying call options on a stock index. B) buying put options on a stock index. C) selling put options on a stock index. D) buying both call and put options with the same expiration date.

Q: The minimum value of a call option equals: A) exercise price - the stock price. B) stock price - exercise price. C) call premium - (stock price - exercise price). D) put premium - (exercise price - stock price).

Q: Which of the following statements is true? A) A call option is said to be out-of-the-money if the underlying stock is selling above the exercise price of the option. B) A put option is said to be in-the-money if the underlying stock is selling below the exercise price of the option. C) A put option is said to be out-of-the-money if the underlying stock is selling below the exercise price of the option. D) A call option is said to be in-the-money if the underlying stock is selling below the exercise price of the option.