CorpFin D4 Revision

You own a call option on a stock that allows you to buy the stock for $100 anytime during the next year. You paid $10 for the call option but it currently worth $15 as the price is now $108. What is your breakeven stock price for the call option?

• $100

• S103

• $110

• S123

Using the Bi-nomial model for an asset with the following information, what is the risk neutral probability of up movement and down movement?
 The size of up-move = 1.4
The size of down-move = 0.7
Risk free rate = 4%

• 48% and 51%

• 70% and 30%

• 40% and 60%

• 20 % and 80

 If you have purchased a call option on a stock with X of $30 for a premium of $4, later on the share’s price has increased to $40 and the premium increased to $5, what is the breakeven point?

• $34

• $35

• $58

• $64

On a one-year binomial model the of value of an asset in the up case is 1.2 and 0.85 in the down case. The current value of the asset is 1 and the annual interest rate is 6 percent. What is the risk neutral probability of an up move?

• 50%

• 60%

• 85%

• 120%

 In a one-year binomial model the value of the up movement is 1.3 and the value of the downside movement is 0.75 and the current value of the asset is 1 and the interest rate is 5 percent. What is the risk neutral probability of an up move?

• 40%

• 54%

• 60%

• 100%

The Black Scholes model of option pricing uses which of the following inputs

• Time to expiration

• Interest rates

• Volatility

• All of the above

How does an increase in interest rates affect the value of a timing option and an expansion option?

(hint both are like calls)

• Increases the value of both a timing and expansion option

• Decreases the value of both a timing and expansion option

• Increases the value of a timing and decreases the value of an expansion option

• Decreases the value of a timing and increases the value of an expansion option

If the volatility increased, what would be the effect on the value of Timing Option and Expansion Option:

•  Both Timing Option Value and Expansion Options Values will increase

•  Both Timing Option Value and Expansion Options Values will decrease.

• Timing Option Value will increase but Expansion Options Values will decrease.

• Timing Option Value will decrease but Expansion Options Values will increase.

In real options valuation using Black Scholes Model BSM, the result will be:

• Value of the option only

• Value of the project

• Value of the option and the project

• TVM of the project

Which of the following would be the most accurate way of characterizing growth options and options to delay investments

• Growth options are like calls, options to delay are like puts

• Growth options are like puts, options to delay are like calls

• Both are equivalent of call options

• Both are equivalent of put options