Corporate Finance 2_Quiz 6

1. 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.

• 1. futures

• 1. straddle

• 1. option

• 1. forward

1. The act where an owner of an option buys or sells the underlying asset, as is his right, is called ________ the option.

• 1. striking

• 1. exercising

• 1. opening

• 1. strangling

1. If a call option has a positive intrinsic value at expiration the call is said to be:

• 1. at the money.

• 1. out of the money.

• 1. funded.

• 1. in the money.

1.  Which of these will increase the value of a call option?

   1. I. An increase in the market value of the underlying asset

   2. II. An increase in the option's strike price

   3. III. A decrease in the market value of the underlying asset

   4. IV. A decrease in the option's strike price

• II and III only

• I and II only

• I only

• I and IV only

5. 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?

• 5. Sell her option today

• 5. Convert her American option into a European option

• 5. Purchase an additional call option on WAN today with a strike price of $20

• 5. Place an order to exercise her option on its expiration date

5.  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:

• 5. unfunded.

• 5. at the money.

• 5. funded.

• 5. out of the money.

5. Put-call parity can be used to show:

• 1. that the value of a call option is always half that of a put given equal exercise

     prices and equal expiration dates.

• 1.  how far in-the-money call options can be.

• 1. the precise relationship between put and call prices given equal exercise prices

     and equal expiration dates.

• 1. how far in-the-money put options can be.

5. 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 ________

• call; $62,000.

• put; $62,000.

• warrant; $62,000.

• call; $50,000.

If you consider stockholders to be the owners of a firm, then those stockholders:

• 1. own a put option on the firm with an exercise price equal to the firm's total

     assets.

• 1. own a call option on the firm with an exercise price equal to the firm's total

     equity.

• 1. have written a put option on the firm with an exercise price equal to the firm's

     total equity.

• 1. own a put option on the firm with an exercise price equal to the firm's total debt.

Alicia is considering purchasing a small building with the intent of opening a craft and sewing center. The cost of the building is $49,000 and the cost to open the center is an additional $150,000. If the center is opened and no other competition is nearby the
project will provide a hefty return. However, should the vacant building down the street

be used for a competitive type entity, then the center could be a losing proposition. Assume the building is purchased but the opening of the center is delayed. This situation would best be described as ________ on a craft and sewing center.

• writing a call option

• purchasing a put option

• writing a put option

• purchasing a call option