BADM 710 FINAL EXAM QUESTIONS WITH VERIFIED
ACCURATE ANSWERS
A European option may be exercised anytime up to and including the expiration date -
Answers - False (A European option may be exercised only on the expiration date.)
The act of buying or selling the underlying asset via the option contract is called
_______________ the option - Answers - Exercising
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 - Answers - Option
The act where an owner of an option buys or sells the underlying asset, as is his right, is
called ______ the option - Answers - Exercising
The fixed price in an option contract at which the owner can buy or sell the underlying
asset is called the option's - Answers - Strike Price
The last day on which an owner of an option can elect to exercise that option is referred
to as the _____ date - Answers - Expiration
An option that may be exercised only on the expiration date is called a(n) _____ option -
Answers - European
If a call option has a positive intrinsic value at expiration the call is said to be - Answers
- In the money
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 - Answers - Call option
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 -
Answers - 1 and 4 only
An out-of-the-money call option is best defined as an option that - Answers - Should not
be exercised at this time
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? - Answers - Sell her
option today
, Which of these will decrease the value of a put 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 -
Answers - 1 and 4 only
An in-the-money put option is one that - Answers - Has an exercise price greater than
the underlying stock price
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 - Answers - Out of the money
Which one of the following statements concerning call option writers is true? - Answers -
The call option writer receives a cash payment when the option is written
The value of an option if it were to immediately expire, that is, its lower pricing bound, is
called an option's _____ value - Answers - Intrinsic
The maximum value of a call option is equal to the - Answers - Price of the underlying
stock
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 ______ - Answers - Call; $50,000
To compute the value of a put using the Black-Scholes option pricing model, you -
Answers - First have to compute the value of both N(-d1) and N(-d2)
An out-of-the-money call option is best defined as an option that - Answers - Should not
be exercised
An in-the-money put option is one that - Answers - Has an exercise price greater than
the underlying stock price
At expiration, the maximum price of a ____ is the greater of the - Answers - Call; stock
price minus the exercise price, or 0
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
market reactions affect the value of call options on Hi-Tech stock? - Answers - Both
reactions increase the value of the call options
Derivatives can be used to either hedge or speculate. These strategies - Answers -
Offset risk by hedging and increase rick by speculating
ACCURATE ANSWERS
A European option may be exercised anytime up to and including the expiration date -
Answers - False (A European option may be exercised only on the expiration date.)
The act of buying or selling the underlying asset via the option contract is called
_______________ the option - Answers - Exercising
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 - Answers - Option
The act where an owner of an option buys or sells the underlying asset, as is his right, is
called ______ the option - Answers - Exercising
The fixed price in an option contract at which the owner can buy or sell the underlying
asset is called the option's - Answers - Strike Price
The last day on which an owner of an option can elect to exercise that option is referred
to as the _____ date - Answers - Expiration
An option that may be exercised only on the expiration date is called a(n) _____ option -
Answers - European
If a call option has a positive intrinsic value at expiration the call is said to be - Answers
- In the money
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 - Answers - Call option
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 -
Answers - 1 and 4 only
An out-of-the-money call option is best defined as an option that - Answers - Should not
be exercised at this time
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? - Answers - Sell her
option today
, Which of these will decrease the value of a put 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 -
Answers - 1 and 4 only
An in-the-money put option is one that - Answers - Has an exercise price greater than
the underlying stock price
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 - Answers - Out of the money
Which one of the following statements concerning call option writers is true? - Answers -
The call option writer receives a cash payment when the option is written
The value of an option if it were to immediately expire, that is, its lower pricing bound, is
called an option's _____ value - Answers - Intrinsic
The maximum value of a call option is equal to the - Answers - Price of the underlying
stock
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 ______ - Answers - Call; $50,000
To compute the value of a put using the Black-Scholes option pricing model, you -
Answers - First have to compute the value of both N(-d1) and N(-d2)
An out-of-the-money call option is best defined as an option that - Answers - Should not
be exercised
An in-the-money put option is one that - Answers - Has an exercise price greater than
the underlying stock price
At expiration, the maximum price of a ____ is the greater of the - Answers - Call; stock
price minus the exercise price, or 0
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
market reactions affect the value of call options on Hi-Tech stock? - Answers - Both
reactions increase the value of the call options
Derivatives can be used to either hedge or speculate. These strategies - Answers -
Offset risk by hedging and increase rick by speculating
