2) The act where an owner of an option buys or sells the underlying asset, as is his right, is called
________ the option.
A) striking
B) exercising
C) opening
D) splitting
E) strangling
Answer: B
1) A financial contract that provides its owner with the right, but not the obligation, to buy or sell
a specified asset at an agreed-upon price on or before a given future date is called a(n) ________
contract.
A) option
B) futures
C) forward
D) swap
E) straddle
Answer: A
3) The fixed price in an option contract at which the owner can buy or sell the underlying asset is
called the option's:
A) opening price.
B) intrinsic value.
C) strike price.
D) market price.
E) time value.
Answer: C
4) The last day on which an owner of an option can elect to exercise that option is referred to as
the ________ date.
A) ex-payment
B) ex-option
D) expiration
E) intrinsic
Answer: D
5) An option that may be exercised only on the expiration date is called a(n) ________ option.
A) European
B) American
C) Bermudian
D) futures
E) Asian
6) The difference between an American option and a European option is that the American
option:
A) has a fixed exercise price while the European exercise price can vary within a small range.
B) is a right to buy while a European option is an obligation to buy.
C) has an expiration date while the European option does not.
D) is written on 100 shares of the underlying security while the European option covers 1,000
shares.
E) can be exercised at any time up to the expiration date while the European option can only be
exercised on the expiration date.
Answer: E
7) An option that may be exercised at any time up to and including its expiration date is called
a(n) ________ option.
A) futures
B) Asian
D) European
E) American
8) If a call option 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.
9) A ________ is a derivative security that gives the owner the right, but not the obligation, to
buy an asset at a fixed price for a specified period of time.
A) futures contract
B) call option
C) put option
E) forward contract
10) If you are the owner of a European call option, you:
A) are obligated to buy the specified assets prior to the option's expiration.
B) have the right to sell the specified assets at the set price at any time up to and including on the
expiration date.
C) have the right to buy the specified assets at the set price only on the expiration date.
D) are obligated to sell the specified assets at the set price if the option is exercised.
E) have the right to buy the specified assets at the set price at any time prior to the option's
expiration.
11) Which of these will increase the value of a call option?
I. An increase in the market value of the underlying asset
II. An increase in the option's strike price
III. A decrease in the market value of the underlying asset
IV. A decrease in the option's strike price
A) I and II only
B) II only
C) II and III only
D) I and IV only
E) I only
12) An out-of-the-money call option is best defined as an option that:
A) has an exercise price below the current market price of the underlying security.
B) should not be exercised at this time.
C) has an exercise price equal to the current market price of the underlying security.
D) has expired.
E) qualifies as an American option.
13) Jillian owns a call option on WAN stock with a strike price of $20 a share. Currently, WAN
is selling for $24.50 a share. Jillian would like to profit on this option but is not permitted to
exercise the option for another two weeks. She believes the stock will decline in value before the
two weeks is up. What should she do?
A) Sell her option today
B) Place an order to exercise her option on its expiration date
C) Purchase an additional call option on WAN today with a strike price of $20
D) Place an order to exercise her option as soon as she is permitted to do so
E) Convert her American option into a European option
14) The owner of a European put option has the:
A) right, but not the obligation, to sell the underlying asset at the specified price only on the
specified date.
B) right, but not the obligation, to sell the underlying asset at the specified price during a
specified period of time.
C) obligation to sell the underlying asset on the specified date, but only if they can do so at the
specified price.
D) obligation to buy the underlying asset sometime during the specified period at the specified
price.
E) right, but not the obligation, to buy the underlying asset at the exercise price on the expiration
date.
15) An option that grants the right, but not the obligation, to sell shares of the underlying asset
during a particular time period at a specified price is called:
A) either an American or a European option.
B) an American call option.
C) an American put option.
D) a European put option.
E) a European call option.
16) Which one of the following provides the right to sell a stock anytime during the option
period at the strike price even if the market price of the stock declines to zero?
A) American call
B) European call
C) American put
D) European put
E) Should the underlying stock price decline to zero, all options are null and void.
17) Which of these will decrease the value of a put option?
B) I and IV only
D) III only
E) IV only
18) An in-the-money put option is one that:
A) has an exercise price greater than the underlying stock price.
B) has an exercise price less than the underlying stock price.
C) expires today.
D) should not be exercised at expiration.
E) should not be exercised at any time.
19) On the expiration day, the maximum price of a put option on a stock is the greater of the:
A) stock price minus the exercise price, or 0.
B) the exercise price or 0.
C) exercise price minus the stock price, or 0.
D) stock price or 0.
E) exercise price or the stock price.
20) Jeff owns an American put option on 100 shares of ABC stock. The option has a strike price
of $32.50 and a September expiration date. The stock has recently been declining in value,
currently sells for $27.65 per share, and is expected to continue declining in value. Ignore all
costs and taxes. If today is Wednesday, August 14, he:
A) cannot exercise his option even though he would like to do so.
B) should hold his option until September.
C) can exercise his option and earn a profit.
D) should exercise his option today and then sell the shares of stock on the September expiration
E) should let his option expire unless the stock price increases above $32.50 a share.
21) A put option on ABC stock with an exercise price of $35 expires today. The current price of
ABC stock is $36. The put is:
22) Which one of the following statements concerning call option writers is true?
A) Call option writers promise to purchase shares if the call option is exercised.
B) The call option writer has the option, but not the obligation, to purchase shares if the option is
exercised.
C) The call option writer is betting that the market price of the underlying asset will increase.
D) The call option writer receives a cash payment when the option is written.
E) The call option writer earns a profit when an in-the-money option is exercised.
23) Eric has an option position on Langdon stock that results in a zero dollar payoff when the
stock price is equal to or greater than the option strike price. What did he do to obtain this
position?
A) Purchased a call option
B) Purchased a put option
C) Wrote a call option
D) Wrote a put option
E) No option position would have this result.
24) Assume you are reviewing a table that lists the current stock option contracts and quotes.
Which one of these statements would correctly apply to that table?
A) If you write a contract you will pay the bid price per share listed in the table.
B) If you write a contract you will receive the difference between the bid and ask prices per
share.
C) The bid price on a specific contract will be higher than the ask price on that same contract.
D) To purchase one contract you must pay 1000 times the quoted bid price shown in the table.
E) To purchase one contract you must pay 100 times the quoted ask price shown in the table.
25) Assume you are reviewing a table that lists the current stock option contracts and quotes. On
a specific contract the table shows an option interest value of 38 and volume of 9. This means
that:
A) 9 contracts were exercised on that day while 38 more were traded.
B) 38 contracts were traded on that day compared to only 9 traded on the previous day.
C) 9 contracts were traded on that day at a price of $.38 per share.
D) 38 contracts were traded on that day at the bid price and 9 were traded at the ask price.
E) 9 of the 38 outstanding contracts traded on that day.
26) The relationship between the prices of the underlying stock, a call option, a put option, and a
riskless asset is referred to as the ________ relationship.
A) put-call parity
B) covered call
C) protective put
D) straddle
E) strangle
27) Given an exercise price, time to maturity, and European put-call parity, the present value of
the strike price plus the price of the call option is equal to the:
A) current market value of the stock.
B) present value of the stock minus the price of a put option.
C) price of a put option minus the market value of one share of stock.
D) value of a risk-free U.S. Treasury bill.
E) price of the stock plus the price of the put option.
28) Selling a covered call is equivalent to:
A) buying a zero coupon bond and selling a put.
B) selling a put and buying an offsetting call.
C) buying the stock and selling the call.
D) selling a zero coupon bond and buying a put.
E) buying a zero coupon bond and buying a call.
29) You can realize the same value as that derived from stock ownership if you:
A) sell a put option and invest at the risk-free rate of return.
B) buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.
C) sell a put, buy a call, and buy a zero-coupon bond.
D) lend out funds at the risk-free rate of return and sell a put option on the stock.
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of
put and call options.
30) Put-call parity can be used to show:
A) how far in-the-money put options can be.
B) how far in-the-money call options can be.
C) the precise relationship between put and call prices given equal exercise prices and equal
expiration dates.
D) that the value of a call option is always twice that of a put given equal exercise prices and
equal expiration dates.
E) that the value of a call option is always half that of a put given equal exercise prices and equal
31) Which combination is referred to as a protective put? Assume all sales and purchases refer to
ABC stock and its option contract.
A) Buying 100 shares of stock and writing one put option contract
B) Selling a put option contract and buying an offsetting call option contract
C) Buying 300 shares of stock and selling three call option contracts
D) Buying a put option contract and buying 100 shares of stock
E) Buying a put option contract and selling a call option contract with the same strike price and
expiration date
32) Assume you purchase one share of a stock and sell a call option on a single share of that
same stock with an exercise price of $25. What is the maximum payoff you can realize on this
combination?
A) The exercise price of $25
B) An amount equal to the stock price on the option expiration date
C) An amount equal to $25 minus the stock price on the option expiration date
D) An amount equal to the stock price on the expiration date plus $25
E) Zero
33) Hi-Tech announces a major expansion which causes the price of its stock to increase and also
causes an increase in the volatility of the stock price. How will these two reactions affect the
value of call options on this stock?
A) Both reactions will decrease the value.
B) Both reactions increase the value.
C) Neither reaction will affect the value.
D) The reactions will have offsetting effects on the value.
E) The change in volatility will have no effect while the increased stock price will increase the
value.
34) New Tek announces a major expansion which causes the price of its stock to increase and
also causes an increase in the volatility of the stock price. How will these two reactions affect the
value of put options on this stock?
B) Both reactions will increase the value.
C) Neither reaction will affect put option values.
E) The change in volatility will have no effect while the increased stock price will decrease the
35) A trading opportunity that offers a riskless profit is called a(n):
A) put option.
B) call option.
C) market equilibrium.
D) arbitrage.
E) cross-hedge.
36) 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
37) The maximum value of a call option is equal to the:
A) strike price minus the initial cost of the option.
B) exercise price plus the price of the underlying stock.
D) price of the underlying stock.
E) purchase price.
38) The lower bound on a call's value is defined as the:
A) greater of the strike price or zero.
B) greater of the stock price minus the exercise price or zero.
C) lesser of the strike price or the stock price.
D) lesser of the strike price or zero.
E) lesser of the stock price minus the exercise price or zero.
39) The lower bound of a call option's value:
A) can be a negative value regardless of the stock or exercise prices.
B) can be a negative value but only when the exercise price exceeds the stock price.
C) can be a negative value but only when the stock price exceeds the exercise price.
D) must be greater than zero.
E) can be equal to zero.
40) The intrinsic value of a call equals the:
A) exercise price minus the stock price.
B) upper bound of the call's value.
C) market price of the call option.
D) lower bound of the call's value.
E) premium paid to purchase the call.
41) The intrinsic value of a put is equal to the:
A) lesser of the strike price or the stock price.
B) lesser of the stock price minus the exercise price or zero.
C) lesser of the stock price or zero.
D) greater of the strike price minus the stock price or zero.
E) greater of the stock price minus the exercise price or zero.
42) Which one of the following statements is correct concerning in-the-money option values?
A) The value of a put decreases as the exercise price increases.
B) The value of a put increases as the price of the underlying stock increases.
C) The value of a call decreases as the exercise price increases.
D) An increase in the underlying stock price decreases both the value of a put and a call.
E) The value of a call decreases as the price of the underlying stock increases.
43) All else held constant, the value of a call decreases when the:
A) time to expiration increases.
B) risk-free rate of return increases.
C) stock price increases.
D) exercise price increases.
E) volatility of the price of the underlying stock increases.
44) Which one of the following will cause the value of a call to decrease?
A) Lowering the exercise price
B) Increasing the time to expiration
C) Increasing the risk-free rate
D) Lowering the risk level of the underlying security
E) Increasing the stock price
45) Assume you own both a May 40 put and a May 40 call on ABC stock. Which one of the
following statements is correct concerning your option positions? Ignore taxes and transaction
costs.
A) An increase in the stock price will increase the value of your put and decrease the value of
your call.
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C) The time premiums on both your put and call are less than the time premiums on equivalent
June options.
D) A decrease in the stock price will decrease the value of both of your options.
E) You can never profit on your positions as your profits on one option will be offset by losses
on the other option.
46) You own both a May 20 call and a May 20 put. 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.
47) An increase in which one of the following will decrease the value of a call option?
A) Interest rate
B) Exercise price
C) Time to expiration
D) Stock volatility
E) Underlying asset price
48) The effect on an option's value of a small change in the value of the underlying asset is called
the option:
A) theta.
B) vega.
C) rho.
D) delta.
E) gamma.
49) In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized,
normally distributed random variable is:
A) less than or equal to N(d2).
B) less than one.
C) equal to one.
D) equal to d1.
E) less than or equal to d1.
50) The Black-Scholes option pricing model is dependent on which five parameters?
A) Stock price, exercise price, risk-free rate, probability of occurrence, and time to expiration
B) Stock price, risk-free rate, probability of occurrence, time to maturity, and variance of the
underlying asset
C) Stock price, risk-free rate, probability of occurrence, variance of the underlying asset, and
exercise price
D) Stock price, exercise price, risk-free rate, variance of the underlying asset, and time to
expiration
E) Exercise price, probability of occurrence, stock price, variance of the underlying asset, and
time to expiration
51) The delta of a call measures the:
A) time remaining to expiration compared to the option's original maturity.
B) change between an option's original value and its current value.
C) swing in the price of the call relative to the swing in the underlying stock price.
D) ratio of the change in the option price to the change in the time to expiration.
E) volatility of the underlying security.
52) 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.
53) 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
54) For every positive net present value project that a firm undertakes, the equity in the firm will
increase the most if the delta of the call option on the firm's assets is:
A) equal to one.
B) between zero and one.
C) equal to zero.
D) between zero and minus one.
E) equal to minus one.
55) Assume a risky firm has both bondholders and stockholders. If the firm obtains a government
loan guarantee on its existing debt, who will gain from this guarantee?
A) Existing stockholders only
B) Both existing bondholders and stockholders in proportion to the firm's debt-equity ratio
C) Existing bondholders and stockholders on an equal basis
D) Existing bondholders only
E) Future stockholders only
56) If you consider bondholders to be the owners of a firm, then those bondholders:
A) own a call option on the firm with an exercise price equal to the firm's total equity.
B) own a put option on the firm with an exercise price equal to the firm's total debt.
C) have written a put option on the firm with an exercise price equal to the firm's total equity.
D) have written a call option on the firm with an exercise price equal to the firm's total debt.
E) own a put option on the firm with an exercise price equal to the firm's total assets.
57) If you consider stockholders to be the owners of a firm, then those stockholders:
58) A purely financial merger:
A) increases shareholder value but does not affect bondholders.
B) decreases both bondholder and shareholder values.
C) transfers bondholder value to shareholders.
D) increases bondholder value but does not affect shareholder value.
E) reduces shareholder value while increasing bondholder value.
59) Shareholders in a levered firm might wish to accept a negative net present value project if it:
A) increases the standard deviation of the returns on the firm's assets.
B) lowers the variance of the returns on the firm's assets.
C) lowers the firm's volatility.
D) diversifies the cash flows of the firm.
E) decreases the risk that a firm will default on its debt.
60) Alicia is considering purchasing a small building with the intent of opening a craft and
sewing center. The cost of the building is $49,000 and the cost to open the center is an additional
$150,000. If the center is opened and no other competition is nearby the project will provide a
hefty return. However, should the vacant building down the street be used for a competitive type
entity, then the center could be a losing proposition. Assume the building is purchased but the
opening of the center is delayed. This situation would best be described as ________ on a craft
and sewing center.
A) purchasing a call option
B) writing a call option
C) purchasing a put option
D) writing a put option
E) exercising a call on the land and writing a put
61) You purchased eight TJH call option contracts with a strike price of $37.50 when the option
quote was $.55. The option expires today when the value of TJH stock is $37.10. Ignoring
trading costs and taxes, what is your total profit on your investment?
A) $0
B) −$120
C) −$440
D) $420
E) $760
Explanation: You will not exercise the call option because the strike price is greater than the
stock price. Why pay more than market price to purchase shares? Thus, your loss is equal to the
amount paid to purchase the option contracts:
Total profit = 8(100)[−$.55 + MAX($37.10 − 37.50, 0)]
Total profit = −$440
62) You purchased five WXO 30 call option contracts at a quoted price of $.34. What is your
total profit on this investment if the price of WXO is $33.60 on the option expiration date?
A) $170
B) $326
C) $1,630
D) $1,440
E) $1,576
Explanation: Total profit = 5(100)[−$.34 + MAX($33.60 − 30, 0)]
Total profit = $1,630
63) You own two call option contracts on ABC stock with a strike price of $15. When you
purchased the contracts the option price was $1.20 and the stock price was $15.90. What is the
total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?
A) $280
B) $180
C) $100
D) $0
E) $29
Explanation: Intrinsic value = Max($14.50 − 15, 0)
Intrinsic value = $0
64) Last week, you purchased one call option contract on DI stock with a strike price of $32.50
and an option price of $1.05. What is the intrinsic value per share of stock if DI is currently
priced at $34.10?
A) $2.15
B) $1.60
C) $.55
D) $.93
E) $0
Explanation: Intrinsic value = Max($34.10 − 32.50, 0)
Intrinsic value = $1.60
The call is in the money.
65) You purchased five CVB call option contracts with a strike price of $40 when the option was
quoted at $3.65. The option expires today when the value of CVB stock is $43. Ignoring trading
costs and taxes, what is your total profit on your investment?
B) −$325
C) $800
D) $1,500
E) −$1,825
Explanation: Total profit = 5(100)[−$3.65 + MAX($43 − 40, 0)]
Total profit = −$325
66) You purchased two WXO 15 call option contracts at a quoted price of $.08. What is your
total profit on this investment if the price of WXO is $14.80 on the option expiration date?
A) −$20
B) −$16
C) $12
D) $16
E) $20
Explanation: Total profit = 2(100)[−$.08 + MAX($14.80 − 15, 0)]
Total profit = −$16
The option expires out of the money.
67) Three weeks ago, you purchased a July 45 put option on RPJ stock at an option price of
$3.20. The market price of RPJ stock three weeks ago was $42.70. Today, RPJ stock is selling at
$44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put
contract?
A) $295
B) $210
C) $0
D) $25
E) $110
Explanation: Contract intrinsic value = 1(100)[Max($45 − 44.75, 0)]
Contract intrinsic value = $25
68) You own ten put option contracts on XYZ stock with an exercise price of $25. What is the
total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?
A) −$500
B) −$50
D) $50
E) $500
Explanation: Intrinsic value of contracts = 10(100)[Max($25 − 24.50, 0)]
Intrinsic value of contracts = $500
69) Three months ago, you purchased three put option contracts on WXX stock with a strike
price of $60 and an option price of $.60. The option expires today when the value of WXX stock
is $48.10. Ignoring trading costs and taxes, what is your total profit on your investment?
A) $180
B) $3,390
C) $60
D) $1,130
E) $1,090
Explanation: Total profit = 3(100)[−$.60 + MAX($60 − 48.10,0)]
Total profit = $3,390
70) Three months ago, you purchased a put option contract on WXX stock with a strike price of
$61 and an option price of $.60. The option expires today when the value of WXX stock is
$63.50. Ignoring trading costs and taxes, what is your total profit on your investment?
A) $310
B) −$60
D) $60
E) −$190
Explanation: Total profit = 1(100)[−$.60 + MAX($61 − 63.50,0)]
71) You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an
option price of $1.20. Today, the option expires and the underlying stock is selling for $33 a
share. Ignoring trading costs and taxes, what is your total profit on this investment?
A) −$3,300
B) −$1,200
C) $120
D) $1,200
E) $3,300
Explanation: Total profit = 10(100)[$1.20 + MIN($33 − 31.20, 0)]
72) You sold a put contract on EDF stock at an option price of $.50 and an exercise price of $21.
Today, EDF stock is selling for $20 a share and your option position was closed out. Ignoring
transaction costs and taxes, what is your total profit?
A) $50
B) $60
C) −$50
D) −$60
Explanation: Total profit = 1(100)[$.50 + MIN($20 − 21, 0)]
73) You wrote ten call option contracts on JIG stock with a strike price of $41 and an option
price of $.60. What is your total profit on this investment if the price of JIG is $46.05 on the
option expiration date?
A) −$5,050
B) −$4,450
C) $4,100
D) $4,450
E) $5,050
Explanation: Total profit = 10(100)[$.60 + MIN($41 − 46.05, 0)]
Total profit = −$4,450
74) You wrote ten put option contracts on JIG stock with a strike price of $40 and an option
price of $.40. What is your total profit on this investment if the price of JIG is $41.05 on the
A) $6,450
B) $5,650
C) $400
D) −$5,650
E) −$6,450
Explanation: The buyer of the put contracts will not exercise the options since the market price
exceeds the strike price. Thus, your total profit equals the option premium you received as the
option writer.
Total profit = 10(100)[$.40 + MIN($41.05 − 40.00, 0)]
Total profit = $400
75) You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an
option price of $1.10. Today, the option expires when the underlying stock is selling for $34.30 a
A) $2,900
B) − $1,100
C) $700
D) $1,100
E) − $2,900
Explanation: Total profit = 10(100)[$1.10 + MIN($34.30 − 32.50,0)]
Total profit = $1,100
76) You sold a put contract on EDF stock at an option price of $.25 and an exercise price of
$22.50. The option expires today when EDF stock is selling for $21.70 a share. Ignoring
transaction costs and taxes, what is your total profit on this investment?
A) $105
B) −$55
C) −$25
D) $55
Explanation: Total profit = 1(100)[$.25 + MIN($21.70 − 22.50,0)]
Total profit = −$55
When the put was exercised, you had to buy at $22.50 and could only resell at $21.70.
Explanation: Cost = 4(100)($.26)
Cost = $104
Explanation: Contract value = 1(100)($6.15)
Contract value = $615
79) The market price of ABC stock has been very volatile and you think this volatility will
continue for several weeks. Thus, you decide to purchase one two-month call option contract on
ABC stock with a strike price of $25 and an option price of $1.30. You also purchase one two-
month put option on ABC stock with a strike price of $25 and an option price of $.50. What will
be your total profit on these positions if the stock price is $25.60 on the day the options expire?
A) −$180
D) $120
E) $180
Explanation: Total profit = 1(100)(−$1.30 − 25 + 25.60) + 1(100)(−$.50)
Total profit = −$120
80) Several rumors concerning Wyslow stock have started circulating. These rumors are causing
the market price of the stock to become increasingly volatile. Given this situation, you decide to
buy both a one-month put and a one-month call option on this stock with an exercise price of
$15. You purchased the call at a quoted price of $.20 and the put at a price of $2.10. What will
be your total profit on these option positions if the stock price is $6 on the day the options
expire?
A) $30
B) $670
C) $690
D) $710
E) $1,110
Explanation: Total profit = 1(100)(−$.20) + 1(100)(−$2.10 − 6.00 + 15.00]
Total profit = $670
81) Tru-U stock is selling for $41 a share. A 6-month call on Tru-U stock with a strike price of
$45 is priced at $1.60. Risk-free assets are currently returning .29 percent per month. What is the
price of a 6-month put on Tru-U stock with a strike price of $45?
A) $2.98
B) $3.00
C) $4.63
D) $4.82
E) $4.90
82) GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike price of
$35 is priced at $.55. Risk-free assets are currently returning .3 percent per month. What is the
price of a 4-month put on GSX stock with a strike price of $35?
A) $2.46
B) $3.48
C) $4.09
D) $2.73
E) $3.02
83) J&L stock has a current market price of $47.60 a share. The one-year call on this stock with
a strike price of $45 is priced at $3.20 while the one-year put with a strike price of $45 is priced
at $.15. What is the risk-free rate of return?
A) 2.71 percent
B) 1.76 percent
C) 1.01 percent
D) 2.04 percent
E) 2.87 percent
84) The market price of ABC stock has been very volatile and you think this volatility will
continue for a few weeks. Thus, you decide to purchase a one-month call option contract on this
stock with a strike price of $25 and an option price of $1.50. You also purchase a one-month put
option on this stock with a strike price of $25 and an option price of $.70. What will be your total
profit on these option positions if the stock price is $24.60 on the day the options expire?
B) −$140
C) −$100
D) $220
E) $140
Explanation: Total profit = 1(100)(−$1.50) + 1(100)(−$.70 + 25.00 − 24.60)
Total profit = −$180
85) Due to technological and market developments, the price of Beta stock has become quite
volatile. Given this, you decide to buy two one-month put option contracts and two one-month
call option contracts on this stock with an exercise price of $15. You purchased the calls at a
quoted price of $.40 and the puts at a price of $2.30. What will be your total profit on these
positions if the stock price is $29 on the day the options expire?
A) $1,890
B) $2,720
C) $2,260
E) $1,360
Explanation: Total profit = 2(100)(−$.40 − 15 + 29) + 2(100)(−$2.30)
Total profit = $2,260
86) You own a call option on Jasper Co. stock that expires in one year. The exercise price is $35.
The current price of the stock is $48 and the risk-free rate of return is 4.5 percent. Assume the
option will finish in the money. What is the current value of the call option per share?
A) $13.00
B) $13.59
C) $13.97
D) $14.51
E) $15.46
87) You currently own a one-year call option on WOI stock with a strike price of $20. The
current stock price is $22.10 and the risk-free rate of return is 3.75 percent. If you assume the
option finishes in the money, what is the current value of your call option per share?
A) $2.02
B) $2.18
C) $1.76
D) $3.13
E) $2.82
88) The common stock of Mercury Motors is selling for $28.97 a share while one-year U.S.
Treasury securities are currently yielding 2.8 percent. What is the current value per share of a
one-year call option on Mercury Motors stock if the exercise price is $22.50 and you assume the
option will finish in the money?
A) $6.29
B) $6.40
C) $6.65
D) $7.67
E) $7.08
89) The common stock of WIN is currently priced at $52.50 a share. One year from now, the
stock price is expected to be either $54 or $60 a share. The risk-free rate of return is 4 percent.
What is the per share value of one call option on WIN stock with an exercise price of $55?
A) $.39
B) $.41
C) $.45
D) $.48
E) $.51
90) You own one call option with an exercise price of $30 on Nadia stock. This stock is currently
selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next
year. The risk-free rate of return is 5 percent. What is the current per share value of your option
if it expires in one year?
A) $.76
B) $.79
C) $.89
D) $.92
E) $.95
91) The assets of Green Light Specials are currently worth $2,100. These assets are expected to
be worth either $1,800 or $2,300 one year from now. The company has a pure discount bond
outstanding with a $2,000 face value and a maturity date of one year. The risk-free rate is 5
percent. What is the value of the equity in this firm?
A) $166.67
B) $231.43
C) $385.71
D) $405.00
E) $714.29
Explanation: Delta = ($300 − 0)/($2,300 − 1,800)
Delta = .60
Equity is a call option on a firm's assets, so:
Value of call = $2,100(.60) − (.60)($1,800/1.05)
Value of call = $231.43
92) Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value
of $1,000. The risk-free rate of return is 4 percent. The assets of Big Ed's are expected to be
worth either $800 or $1,300 in one year. Currently, these assets are worth $1,140. What is the
current value of the debt of Big Ed's Electrical?
A) $222.46
B) $370.77
C) $514.28
D) $769.23
E) $917.54
Explanation: Delta = ($300 − 0)/($1,300 − 800)
Value of call = $1,140(.60) − (.60)($800/1.04)
Value of call = $222.46
Value of debt = $1,140 − 222.46
Value of debt = $917.54
93) Martha B's has total assets of $1,810. These assets are expected to increase in value to either
$1,900 or $2,400 by next year. The company has a pure discount bond outstanding with a face
value of $2,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.5
A) $6.98
B) $7.24
C) $6.67
D) $7.08
E) $7.89
Explanation: Delta = ($400 − 0)/($2,400 − 1,900)
Delta = .80
Value of call = $1,810(.80) − (.80)($1,900/1.055)
Value of call = $7.24
97) Assume the delta of a call option on a firm's assets is .608. This means a project valued at
$65,000 will increase the value of the firm's equity by:
A) $27,902.
B) $39,520.
C) $43,820.
D) $63,131.
E) $89,600.
99) The current market value of the assets of ABCD is $86.28 million. The call option value on
the firm's assets is $53.09 million. What is the market value of the firm's debt?
A) $74.49 million
B) $31.36 million
C) $33.19 million
D) $44.08 million
E) $139.37 million
Explanation: Market value of debt = $86.28m − 53.09m
Market value of debt = $33.19m
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