Exam 8: Financial Options

A) -$510.25
B) $1,989.75
C) $2,089.24
D) $2,193.70
E) $2,303.38

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B

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.

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A) GCC's stock price suddenly increases.
B) The exercise price of the option is increased.
C) The life of the option is increased, i.e., the time until it expires is lengthened.
D) The Federal Reserve takes actions that increase the risk-free rate.
E) GCC's stock price becomes more risky (higher variance) .

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A) The price of the call option will increase by $2.
B) The price of the call option will increase by more than $2.
C) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
E) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

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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.

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E

A) $2.81
B) $3.12
C) $3.47
D) $3.82
E) $4.20

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A) If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
B) Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
C) Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
D) Call options generally sell at a price below their exercise value, and the lower the exercise value, 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.

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A) $2.43
B) $2.70
C) $2.99
D) $3.29
E) $3.62

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A) The options with the $25 strike price will sell for $5.
B) The options with the $25 strike price will sell for less than the options with the $35 strike price.
C) The options with the $25 strike price have an exercise value greater than $5.
D) The options with the $35 strike price have an exercise value greater than $0.
E) If Deeble's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.

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E

A) The price of these call options is likely to rise if XYZ's stock price rises.
B) The higher the strike price on XYZ's options, the higher the option's price will be.
C) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
D) If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.
E) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.

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A) In-the-money
B) Put
C) Naked
D) Covered
E) Out-of-the-money

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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.

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