question bank for chapter 9

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Course Hero has millions of student submitted documents similar to the one below including study guides, homework solutions, papers, exam answer keys and textbook solutions. 9 CHAPTER FINANCIAL OPTIONS AND APPLICATIONS IN CORPORATE FINANCE True/False Easy: 1 . (9.1) Options Answer: a EASY An option is a contract that 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 (9.1) Strike price Answer: a EASY The strike 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 (9.1) Exercise value Answer: a EASY The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price. a. True b. False (9.1) Exercise value Answer: b EASY The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options. a. True b. False (9.1) Option time value Answer: a EASY As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased. a. True b. False 2 . 3 . 4 . 5 . Chapter 9: Financial Options True/False Page 47 6 . (9.1) Option pricing Answer: b If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value. a. True b. False EASY 7 . (9.1) Option pricing Answer: b EASY If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price. a. True b. False (9.1) Option pricing Answer: b EASY Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant. a. True b. False (9.1) Option pricing Answer: b Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant. a. True b. False (9.1) Option pricing Answer: b EASY If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant. a. True b. False (9.4) Put-call parity Answer: b EASY 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, provided the strike prices for the put and call are the same. a. True b. False EASY 8 . 9 . 10 . 11 . Page 48 True/False Chapter 9: Financial Options Medium: 12 . (9.4) Put-call parity Answer: b MEDIUM
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