HW5 - Problem Set 5 - FINA 4200 Spring 2010 Due Tuesday...

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Problem Set 5 - FINA 4200 Spring 2010 Due Tuesday April 6 before class I. Multiple Choices 1. The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option’s _____ value. a. strike b. market c. volatility d. time e. intrinsic 2. If a call has a positive intrinsic value at expiration the call is said to be: a. funded. b. unfunded. c. at the money. d. in the money. e. out of the money. 3. The lower bound on a call’s value is either the: a. strike price or zero, whichever is greater. b. stock price minus the exercise price or zero, whichever is greater. c. strike price or the stock price, whichever is lower. d. strike price or zero, whichever is lower. e. stock price minus the exercise price or zero, whichever is lower. 4. You own both a May 20 call and a May 20 put with the same strike prices. If the call finishes in the money, then the put will: a. also finish in the money. b. finish at the money. c. finish out of the money. d. either finish at the money or in the money. e. either finish at the money or out of the money. 5. You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of: a. put; $62,000. b. put; $50,000. c. warrant; $62,000. d. call; $62,000. e. call; $50,000. 1
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6. If you consider the equity of a firm to be an option on the firm’s assets then the act of paying off debt is comparable to _____ on the assets of the firm. a. purchasing a put option b. purchasing a call option c. exercising an in-the-money put option d. exercising an in-the-money call option e. selling a call option The following information should be used for problems #7 – 8: Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. 7. Which of the following correctly identifies the impact of these changes on the call option of Tele- Tech Com? a. Both changes cause the price of the call option to decrease. b. Both changes cause the price of the call option to increase. c. The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase. d. The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease. e. The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease. 8.
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HW5 - Problem Set 5 - FINA 4200 Spring 2010 Due Tuesday...

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