Brealey. Myers. Allen Chapter 21 Test

# Brealey. Myers. Allen Chapter 21 Test - Chapter 21 Valuing...

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Brealey/Myers/Allen, Principles of Corporate Finance, 8/e 1 Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher standard deviation of return C) A higher beta and a lower standard deviation of return D) A lower beta and a lower standard deviation of return Answer: A Type: Difficult Page: 565 2. A call option has an exercise price of \$100. At the final exercise date, the stock price could be either \$50 or \$150. Which investment would combine to give the same payoff as the stock? A) Lend PV of \$50 and buy two calls B) Lend PV of \$50 and sell two calls C) Borrow \$50 and buy two calls D) Borrow \$50 and sell two calls Answer: A Type: Difficult Page: 566 Response: Value of two calls: 2 (150 - 100) = 100 or value of two calls =: 2(0) = 0 (not exercised); payoff = 100 + 50 = 150 or payoff = 0 + 50 = 50 3. The option delta is calculated as the ratio: A) (the spread of possible share prices) / (the spread of possible option prices) B) (the share price) / (the option price) C) (the spread of possible option prices) / (the spread of possible share prices) D) (the option price) / (the share price) Answer: C Type: Medium Page: 567 4. Suppose Ralph's stock price is currently \$50. In the next six months it will either fall to \$30 or rise to \$80. What is the option delta of a call option with an exercise price of \$50? A) 0.375 B) 0.500 C) 0.600 D) 0.75 Answer: C Type: Medium Page: 567 Response: Option delta = (30 - 0)/(80 - 30) = 30/50= 0.6

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Test Bank, Chapter 21 2 5. Suppose Waldo's stock price is currently \$50. In the next six months it will either fall to \$40 or rise to \$60. What is the current value of a six-month call option with an exercise price of \$50? The six-month risk-free interest rate is 2% (periodic rate). A) \$5.39 B) \$15.00 C) \$8.25 D) \$8.09 Answer: A Type: Difficult Page: 567 Response: Replicating portfolio method: Call option payoff = 60 -50 = 10 and zero; (60)(A) + (1.02)(B) = 10, (40)(A) + 1.02(B) = 0; A = 0.5 (option delta) & B = -19.61; call option price (current) = 0. 5(50) - 19.61 = \$5.39 Risk- neutral valuation: 50 = [x(60) + (1-x)40]/1.02) ; x = 0. 55; (1-x )= 0.45; Call option value = [(0.55)(10) + (0.45)(0)]/(1.02) = \$5.39 6. Suppose Waldo's stock price is currently \$50. In the next six months it will either fall to \$40 or rise to \$80. What is the current value of a six-month call option with an exercise price of \$50? The six-month risk-free interest rate is 2% (periodic rate). A) \$2.40 B) \$15.00 C) \$8.25 D) \$8.09 Answer: D Type: Difficult Page: 567 Response: Replicating portfolio method: Call option payoff = 80-50 = 30 and zero; (80)(A) + (1.02)(B) = 30, (40)(A) + 1.02(B) = 0; A = 0.75 (option delta) & B = -29.41; call option price (current) = 0.75(50) - 29.41 = \$8.09 Risk- neutral valuation: 50 = [x(80) + (1-x)40]/1.02) ; x = 0.275; (1-x )= 0.725; Call option value = [(0.275)(30) + (0.725)(0)]/(1.02)
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## This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Brealey. Myers. Allen Chapter 21 Test - Chapter 21 Valuing...

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