Reference no: EM131764556

Question 1: What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $65?

Question 2: Assuming nothing else changes, what happens to the value of an option as time passes and the expiration date gets closer?

- Value stays the same

- Value increases

- Value decreases

Question 3: What is the value at expiration of a call option with a strike price of $65 if the stock price is $100?

Question 4: You hold an American option to sell one share of a stock. The option expires tomorrow. The strike price of the option is $50, and the current stock price is $49. What is the value of exercising the option today?

Question 5: Which of the following statements is true of a call option?

- The value of a call option can never be positive.

- The value of a call option can be more than the value of the underlying asset.

- The value of a call option can never be worth less than the current value of the asset minus present value of the strike price.

- The value of a call option can be worth more than the strike price.

Question 6: A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can't raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. Assume the risk-free interest rate is 0 percent. By taking these derivative positions, what is the minimum amount that the farmer will earn per bushel? (Do not enter the $ sign.)

Question 7: A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can't raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. Assume the risk-free interest rate is 0 percent. By taking these derivative positions, what is the maximum amount that the farmer will earn per bushel? (Do not enter the $ sign.)

Question 8: Which of the following changes, when considered individually, will increase the value of a call option?

- The value of the underlying asset becomes more volatile

- The price of the underlying asset goes down

- Getting closer to the expiration date (the passage of time)

- A higher strike price

Question 9: With everything else constant, as the expiration date gets closer, what happens to the value of call and put options?

- Call option will be worth more, put options will be worth less.

- Call option will be worth less, put options will be worth more.

- Both call and put options will be worth more.

- Both call and put options will be worth less.

Question 10: Pitchgent, Inc., stock is currently trading at $22 per share. There are two types of options available on the stock. Call options with a strike price of $16, which expire next month, are currently trading at $7.00. Put options with a strike price of $16 which expire next month are currently trading at $1.10. Larry invests $132 in common stock. Keaty invests $132 in the call options. Marek invests $132 in the put options. At the end of one month, the price of Pitchgent, Inc., is $25. Who made the most money off of their investment?

- Larry

- Keaty

- Marek

- Larry and Keaty tied

Question 11: Put-Call Parity with Continuous Compounding

Calculate the value of put option with the given information. Value of the call option is $6.2, the exercise price is $58, risk-free rate of interest is 5.5%, the time before the option expires is one year and the current value of underlying assets is $52. Consider the value for ‘e' as 2.71828. (Omit the dollar sign.)

Question 12: The management at PhoneUn considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If its new line of cars is poorly received, its plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles:

- the premium of a put option on the plant.

- he premium of a call option on the plan

- the strike price of a put option on the plant.

- the strike price of a call option the plant.

Question 13: As the manager of a sporting goods company, you are presented with a new golf project. An inventor has recently patented the design for a new golf club that makes playing golf much easier. Your company has made contact with the inventor, who is willing to sell the exclusive rights to the technology, but if you don't act fast he will sell the rights to a rival company. You are not certain whether the new golf club will become popular, but your analysts have completed a basic NPV analysis. Given the available information, the project has a positive NPV. However, you know there are several real options associated with the project, including the option to abandon the project and the option to make follow-on investments. Which one of the following statements regarding the project is correct?

- Based on the NPV analysis, you should accept the project. The value of the project may be worth more than the NPV analysis but not less.

- Based on the NPV analysis, you should accept the project. The NPV analysis contains all the information about the value of the project.

- Based on the NPV analysis, you should reject the project. Without additional information about the value of the real options, there is no way to make a decision.

- Based on the NPV analysis, you should reject the project. The NPV analysis contains all the information about the value of the project.

Question 14: Binomial pricing (call option): Assume that the stock of Malcolm's Mufflers, Inc., is currently trading for $43 and will either rise to $55 or fall to $17 in one year. The risk-free rate for one year is 8 percent. What is the value of a call option with a strike price of $45?

- $4.40

- $5.84

- $6.84

- $7.17

Question 15: Consider a lease agreement recently offered by a car dealership. The agreement gives the customer the right to use a new SUV for 4 years in exchange for payments of $650 per month. At the end of the lease, the customer can choose to purchase the SUV for $18,000. What sort of option does this resemble?

- A put option on the SUV with a strike price of $18,000

- A call option on the SUV with a strike price of $18,000

- A put option on the SUV with a strike price of $17,800

- A call option on the SUV with a strike price of $17,800

Question 16: Binomial Pricing (Put Option):

Assume that the stock of TuneSeis, Inc., is currently trading for $29 and will either rise to $32 or fall to $5 in one year. The risk-free rate for one year is 2 percent. What is the value of a put option with a strike price of $30? (Do not round intermediate computations. Round final answer to two decimal places.)