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4. If you __________, then you may be forced to buy the underlying stock.

  1. Buy a Call Option
  2. Buy a Put Option
  3. Sell a Call Option
  4. Sell a Put Option

5. Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices.

  1. Higher, Higher
  2. Higher, Lower
  3. Lower, Lower
  4. Lower,Higher

6. Which Statement is correct?

  1. Speculators make money by setting up transactions and are the go betweens in the derivatives market.
  2. A firm should always hedge in order to reduce risk whenever they can
  3. Hedgers do not mind losing money as long as they are reducing their risk
  4. Brokers try to find mispricings in the market where they can buy at a low price and simultaneously sell at a high price without taking on any risk.

7. Which statement regarding executive stock options is correct?

  1. They are short term and usually expire after one year.
  2. They should reduce agency costs by making managers act like shareholders
  3. They are included as compensation expense on the income statement.
  4. Managers can sell the options on an exchange

8. Which of the following statements are correct?

  1. Forward contracts are standardized and trade on an exchange
  2. Profits and Losses on Futures contracts are marked to market on a daily basis.
  3. Delivery of the assets almost never occurs in the forward market
  4. Futures contracts allow you to buy or sell individual stocks for a preset price on the expiration date.

9. You need a barrel of oil next month. You could either buy the oil today and keep it for a month, wait and buy the oil next month when you need it, you could enter into a futures contract to buy oil at the current futures price $81, or you can pay $2 for a call option that gives you the right to buy oil for $80. The current spot price is $79 and the risk free rate is 2%, and carrying costs are $2. If the price ends up being $84 next month, then you should have ______________.

  1. Waited to buy the oil
  2. Entered into a futures contract
  3. Bought a call option
  4. Buy the oil today and store it for a month.

10. Which of these should cause the dollar to appreciate?

  1. A decline in foreign demand for US goods and services
  2. An increase in US demand for foreign goods and services
  3. An increase in foreign demand for US financial assets
  4. An increase in the amount of gold held by the US central bank

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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Related questions

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8. Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9. Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8. Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9. Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

Which of the following is correct?

NPV will be higher if sunk costs are included in a project's cash flows
A good example of a sunk cost is a situation where a company builds a restaurant and that results in lower sales by another of its restaurants.
A good example of a sunk cost is a situation where a company builds a restaurant and closes another of its restaurants.
A good example of a sunk cost is a situation where a company evaluated a site for a new restaurant last year, expensed the cost on its income statement, and now builds the restaurant

none of the above

2.

TUNDRA Corporation's stock sells for $50 per share. A call option on the stock has a strike price of $55. A put option on the stock also has a strike price of $55. Which of the following is correct?

The call option is in-the-money
The put option is in-the-money
Both the call option and the put option are out-of-the money
The call option has a value of $5

none of the above

3.

A firm plans to purchase equipment for $1.5 million. It will cost 200,000 to modify it for use in the firm's facility. The equipment is in the 3-year MACRS class. Calculate depreciation expense for Year 3.

222,150
$251,770
$566,667
$500,000

none of the above

4.

A proposed project is much riskier than average. The best way to account for its added risk is:

Ignoring it because project risk cannot be measured accurately.
Decreasing the discount rate to account for the higher risk
Increasing the discount rate to account for the higher risk
Reducing the NPV by 5% to account for the higher risk

none of the above

5.

A company needs to decide whether to invest in a project now or wait a year until better information is available. The project has a positive expected NPV, but it could be negative if cash flows are less than expected. No competitors are likely to invest in a similar project if the company decides to wait. Which of the following best describes the issues the company is facing in making its decision?

The more uncertainty about the future cash flows, the more reason to go ahead with the project today.
NPV should be even higher by waiting a year, since it is positive today.
The project should be adopted now to lock in the expected positive NPV.
Waiting would probably reduce the project's risk.

none of the above

6.

A stock is currently selling for $25. A 6-month call option on the stock has a strike price of $30 and sells for $0.50. Calculate the exercise value of the option?

$0.00
$4.50
$5.00
$24.50

none of the above

7.

Which of the following is not a real option?

The option to switch the type of vehicle manufactured in a plant
The option to expand into a foreign country
The option to buy shares of stock if its price goes up.
The option to abandon a project.

none of the above

8.

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

$2.99
$2.70
$2.43
$3.29

$3.62

9.

A company purchases equipment for $5 million, incurs shipping costs of $30,000 and installation costs of $50,000. It also requires additional net working capital of $100,000. What is the depreciable base?

$5,000,000
$5,180,000
$5,080,000
$5,030,000

none of the above

10.

Which of the following is an example of a real option?

An option to buy stock at a specified price for a specified period of time
An option to sell stock at a specified price for a specified period of time
An option to invest in a project today or to wait a year.
An option to buy either an American or European option
none of the above

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