Corporate-Finance---Berk-DeMarzo--Test-Bank-Chapte

1Copyright©2014PearsonEducation,Inc.CorporateFinance,3e(Berk/DeMarzo)Chapter20FinancialOptions20.1OptionBasics1)WhichofthefollowingstatementsisFALSE?A)Acalloptiongivestheownertherighttobuytheasset.B)Aputoptiongivestheownertherighttoselltheasset.C)Afinancialoptioncontractgivesthewritertheright(butnottheobligation)topurchaseorsellanassetatafixedpriceatsomefuturedate.D)Astockoptiongivestheholdertheoptiontobuyorsellashareofstockonorbeforeagivendateforagivenprice.Answer:CExplanation:C)Afinancialoptioncontractgivestheownertheright(butnottheobligation)topurchaseorsellanassetatafixedpriceatsomefuturedate.Diff:1Section:20.1OptionBasicsSkill:Conceptual2)WhichofthefollowingstatementsisFALSE?A)Whenaholderofanoptionenforcestheagreementandbuysorsellsashareofstockattheagreed-uponprice,heisexercisingtheoption.B)Therearetwokindsofoptions.Europeanoptionsallowtheirholderstoexercisetheoptiononanydateuptoandincludingafinaldatecalledtheexpirationdate.C)Becauseanoptionisacontractbetweentwoparties,foreveryownerofafinancialoption,thereisalsoanoptionwriter,thepersonwhotakestheothersideofthecontract.D)Thepriceatwhichtheholderbuysorsellstheshareofstockwhentheoptionisexercisediscalledthestrikepriceorexerciseprice.Answer:BExplanation:B)Therearetwokindsofoptions.Americanoptionsallowtheirholderstoexercisetheoptiononanydateuptoandincludingafinaldatecalledtheexpirationdate.Diff:1Section:20.1OptionBasicsSkill:Conceptual2Copyright©2014PearsonEducation,Inc.3)WhichofthefollowingstatementsisFALSE?A)Theoptionbuyer,alsocalledtheoptionholder,holdstherighttoexercisetheoptionandhasalongpositioninthecontract.B)Themarketpriceoftheoptionisalsocalledtheexerciseprice.C)Ifthepayofffromexercisinganoptionimmediatelyispositive,theoptionissaidtobein-the-money.D)Aswithotherfinancialassets,optionscanbeboughtandsold.Standardstockoptionsaretradedonorganizedexchanges,whilemorespecializedoptionsaresoldthroughdealers.Answer:BExplanation:B)Themarketpriceoftheoptionisalsocalledtheoptionpremium.Diff:2Section:20.1OptionBasicsSkill:Conceptual4)WhichofthefollowingstatementsisFALSE?A)Aholderwouldnotexerciseanin-the-moneyoption.B)Theoptionseller,alsocalledtheoptionwriter,sells(orwrites)theoptionandhasashortpositioninthecontract.C)Becausethelongsidehastheoptiontoexercise,theshortsidehasanobligationtofulfillthecontract.D)Whentheexercisepriceofanoptionisequaltothecurrentpriceofthestock,theoptionissaidtobeat-the-money.Answer:AExplanation:A)Aholderwouldnotexerciseanout-of-the-moneyoption.Diff:2Section:20.1OptionBasicsSkill:Conceptual5)WhichofthefollowingstatementsisFALSE?A)Optionsalsoallowinvestorstospeculate,orplaceabetonthedirectioninwhichtheybelievethemarketislikelytomove.B)Optionswherethestrikepriceandthestockpriceareveryfarapartarereferredtoasdeepin-the-moneyordeepoutof-the-money.C)Calloptionswithstrikepricesabovethecurrentstockpricearein-the-money,asareputoptionswithstrikepricesbelowthecurrentstockprice.D)Europeanoptionsallowtheirholderstoexercisetheoptiononlyontheexpirationdate—holderscannotexercisebeforetheexpirationdate.Answer:CExplanation:C)Calloptionswithstrikepricesbelowthecurrentstockpricearein-themoney,asareputoptionswithstrikepricesabovethecurrentstockprice.Diff:2Section:20.1OptionBasicsSkill:Conceptual3Copyright©2014PearsonEducation,Inc.6)Thewriterofacalloptionhas:A)theobligationtosellasecurityforagivenprice.B)theobligationtobuyasecurityforagivenprice.C)therighttosellasecurityforagivenprice.D)therighttobuyasecurityforagivenprice.Answer:ADiff:1Section:20.1OptionBasicsSkill:Definition7)Theholderofaputoptionhas:A)theobligationtosellasecurityforagivenprice.B)therighttobuyasecurityforagivenprice.C)therighttosellasecurityforagivenprice.D)theobligationtobuyasecurityforagivenprice.Answer:CDiff:1Section:20.1OptionBasicsSkill:Definition8)Usingoptionstoreduceriskiscalled:A)speculation.B)anakedposition.C)hedging.D)acoveredposition.Answer:CDiff:1Section:20.1OptionBasicsSkill:Definition9)Usingoptionstoplaceabetonthedirectioninwhichyoubelievethemarketislikelytomoveiscalled:A)speculation.B)hedging.C)acoveredposition.D)anakedposition.Answer:ADiff:1Section:20.1OptionBasicsSkill:Definition4Copyright©2014PearsonEducation,Inc.Usethetableforthequestion(s)below.ConsiderthefollowinginformationonoptionsfromtheCBOEforMerck:10)Assumeyouwanttobuyoneoptioncontractthatwithanexercisepriceclosesttobeingat-the-moneyandthatexpiresJanuary2009.Thecurrentpricethatyouwouldhavetopayforsuchacontractis:A)$680B)$380C)$650D)$420Answer:AExplanation:A)Onecontractisfor100shares.Theoptionclosesttobeingatthemoneyhasanexercisepriceof$40.00andcurrentlyhasanaskpriceof$6.80.Sinceyouarebuyingtheoption,youwillhavetopaytheaskprice.So$6.80×100sharespercontract=$680Diff:2Section:20.1OptionBasicsSkill:Analytical11)TheopeninterestforJanuary2009putoptionthatisclosesttobeingat-the-moneyis:A)7174B)982C)319D)8422Answer:ADiff:2Section:20.1OptionBasicsSkill:Analytical5Copyright©2014PearsonEducation,Inc.12)HowmanyoftheJanuary2009putoptionsareinthemoney?A)1B)3C)2D)4Answer:CExplanation:C)Foraputoptiontobeinthemoney,itscurrentstock