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CHAPTER 8 FINANCIAL OPTIONS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, T = Tough) True-False Easy: Options Answer: a Diff: E 1 . An option is a contract which gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time. a. True b. False Exercise price Answer: a Diff: E 2 . The exercise price is the price that must be paid for a share of common stock when it is bought by exercising a warrant. a. True b. False Strike price Answer: b Diff: E 3 . The strike price is different from the exercise price and deals with convertibles rather than with warrants. a. True b. False Option premium Answer: a Diff: E 4 . As the price of a stock rises, the premium investors are willing to pay for a call option increases because of the immediate capital gain that can be realized by exercising the option, and from the possibility that the stock price could go higher. a. True b. False Option pricing Answer: b Diff: E 5 . If the current price of a stock is below the strike (exercise) price and there is still time before expiration, there will not be a premium in the market price of a call option on the stock. a. True b. False Chapter 8 - Page 1
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Multiple Choice: Conceptual Easy: Options Answer: b Diff: E 6 . An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n) a. Call option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option. Option value Answer: d Diff: E 7 . The value of an option depends on the stock's price, the risk-free rate, and the a. Exercise price. b. Variability of the stock price. c. Option's time to maturity. d. All of the above. e. None of the above. Option concepts Answer: a Diff: E 8 . There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors affecting the value of these call options? a. The price of the call options is likely to rise if XYZ’s stock price rises. b. The higher the strike price on the call option, the higher the call option price. c. Assuming the same strike price, a call option which expires in one month will sell for a higher price than a call option which expires in three months. d. All of the answers above are correct.
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