IFM10 Ch 06 Test Bank

IFM10 Ch 06 Test Bank - CHAPTER 6 FINANCIAL OPTIONS...

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CHAPTER 6 FINANCIAL OPTIONS (Difficulty: E = Easy, M = Medium, T = Tough) True-False Easy: (6.1) 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 (6.1) 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 (6.1) 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 (6.1) Option time value Answer: a Diff: E 4 . As the price of a stock rises, the time value 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 (6.1) 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 time value in the market price of a call option on the stock. a. True b. False Chapter 6: Financial Options Page 1
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Multiple Choice: Conceptual Easy: (6.1) 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. (6.1) 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. (6.1) 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. e. None of the answers above is correct. (6.1) Option concepts Answer: b Diff: E 9 . Which of the following events is likely to decrease the value of call options on the common stock of GCC Company? a. An increase in GCC’s stock price.
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This note was uploaded on 02/02/2012 for the course FIN 516 taught by Professor None during the Spring '11 term at DeVry Fremont.

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IFM10 Ch 06 Test Bank - CHAPTER 6 FINANCIAL OPTIONS...

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