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Exam 25: Option Valuation

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Question 171

Multiple Choice

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A stock is currently selling for $28 a share. The risk-free rate is 4.5 percent and the standard deviation is 35 percent. What is the value of d1 of a 3-month call option with a strike price of $25?

A) .4207
B) .5413
C) .6488
D) .7479
E) .7994

F) A) and B)
G) B) and C)

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Question 172

Multiple Choice

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The current market value of the assets of Thompson Pumps is $37.29 million. The market value of the equity is $6.87 million. What is the market value of the firm's debt?

A) $29.71 million
B) $30.42 million
C) $36.87 million
D) $42.13 million
E) $44.16 million

F) B) and C)
G) A) and C)

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Question 173

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The minimum value of a convertible bond is given by its straight-bond value or its conversion value, whichever is greater.

Stock price Is a variables that is included in the Black-Scholes call option pricing formula.

The Black-Scholes Option Pricing Model as it pertains to calls is based on the stock price, strike price, time to maturity, standard deviation of the stock, and the price of the

Which of the following best defines a European options?

The bonds of VDM, Inc. are convertible into shares of the firm's common stock at $50 per share. The current price of the common stock is $45 per share. The bonds have a $1,000 par value and Currently sell for $950 apiece. When the bonds were issued, the market price of the common stock Was $40. Thus, what was the conversion premium at issuance?

ESOs may have a vesting period of up to three years.

A ticket to a baseball game gives the holder the right, but not the obligation, to attend a specified game. Thus, a baseball ticket is effectively a(n) ________ option on the possession of a seat, which Has an expiration date equal to __________.

Last week, you purchased a call option on Rosewood stock at an option price of $6.80. The stock price last week was $34.50. The strike price is $40. What is the intrinsic value of your investment if Rosewood is currently priced at $38.75?

What is the value of d2 given the following information on a stock?

Based on your research, you believe that Jet-Electro stock will rise by 130% by the end of the year. As a rational investor, you could make money by doing each of the following EXCEPT:

Suppose your wealthy Aunt Minnie has asked you to manage her large stock portfolio. You would like to buy and/or sell options on many of the stocks she owns. Describe the types of options you would buy or sell, as well as your rationale, given the following circumstances: A. Aunt Minnie owns 10,000 shares of IBM common stock. You believe it is going to fall in price, but she won't let you sell it because her late husband told her never to let it go. How do you protect her from the impending price decline? B. Your analysis suggests that the common stock of Jet-Electro is poised to increase in value sharply over the next year. Aunt Minnie doesn't want to buy any of the stock, but does want you to use options to profit if the price rises. What do you do? C. Although Aunt Minnie doesn't want you sell any of the stocks she owns, she would like you to use options to generate a little extra income. How might you do this?

Options with payoffs in real goods, as opposed to asset prices are known as _______.

If a call option is "in-the-money" on the expiration date, the:

Underlying stock price: 45.80 Suppose you bought 10 Glaxo Oct 45 call contracts. Just before the option expires, the stock is selling for $50. What is your net profit (or loss) ? Ignore transaction costs.

The value of an option is equal to the:

You own one call option with an exercise price of $55 on Doo Little stock. The stock is currently selling for $55.20 a share but is expected to sell for either $54 or $62 a share in one year. The risk- Free rate of return is 3 percent and the inflation rate is 2.5 percent. What is the current option price If the option expires one year from now?

The value of a risk-free bond can be duplicated by combining a risky bond with a _____ option on the assets of the firm with a _______ maturity date and a strike price _____ to the face value of the Bond.

The value of an American call option decreases when the expiration date is extended.