BMGT444 Final UPDATED ACTUAL
Exam Questions and CORRECT Answers
Which of the following is NOT true? - CORRECT ANSWER - The holder of a call or put
option must exercise the right to sell or buy an asset.
When an exchange-traded call option on IBM stock is exercised, IBM issues more stock.
Which of the following must post margin? - CORRECT ANSWER - The seller of an
option
An action that reduces the risks involved in owning an asset or commodity by making a
counteracting sale of that asset is called: - CORRECT ANSWER - Hedging
Which of the following describes how American options can be valued using a binomial tree? -
CORRECT ANSWER - Check whether early exercise is optimal at all nodes where the
option is in-the-money
What was the original Black-Scholes-Merton model designed to value? - CORRECT
ANSWER - A European option on a stock providing no dividends
Which of the following is true when dividends are expected? - CORRECT ANSWER -
The Black-Scholes-Merton model can be adjusted by subtracting the present value of expected
dividends from the stock price
Which of the following describes delta? - CORRECT ANSWER - The ratio of a change in
the option payoff to the corresponding change in the stock price
An abandonment option, in effect, - CORRECT ANSWER - Limits the downside risk of
an investment project
, The following are examples of expansion options: - CORRECT ANSWER - I) A mining
company acquires mineral rights to land that is not worth developing today but could be
profitable if ore prices increase.
II) A film studio acquires the rights to produce a film based on the novel.
III) A real estate developer acquires a parcel of land that could be turned into a shopping mall.
IV) A pharmaceutical company purchases a patent to market a new drug.
In real options, the required investment is considered the exercise price. - CORRECT
ANSWER - True
In terms of real options, foregone cash flows from the project play the same role as: - CORRECT
ANSWER - Dividends
Which of the following are examples of real options? - CORRECT ANSWER - I) the
option to expand if an investment project succeeds;
II) the option to wait (and learn) before investing;
III) the option to shrink or abandon a project;
IV) the option to vary the mix of output or the firm's production methods
Production facilities that are flexible, in terms of the potential to use different combinations of
raw material inputs, are most valuable when: - CORRECT ANSWER - Raw material
prices are highly volatile
The value of flexibility is lowest when - CORRECT ANSWER - Uncertainty is low and
managers cannot react to new information.
The following are practical challenges in applying real-options analysis: - CORRECT
ANSWER - I) Real options can be complex.
II) The real options problems may not be well structured.
III) Competition may reduce or change the value of real options.
Exam Questions and CORRECT Answers
Which of the following is NOT true? - CORRECT ANSWER - The holder of a call or put
option must exercise the right to sell or buy an asset.
When an exchange-traded call option on IBM stock is exercised, IBM issues more stock.
Which of the following must post margin? - CORRECT ANSWER - The seller of an
option
An action that reduces the risks involved in owning an asset or commodity by making a
counteracting sale of that asset is called: - CORRECT ANSWER - Hedging
Which of the following describes how American options can be valued using a binomial tree? -
CORRECT ANSWER - Check whether early exercise is optimal at all nodes where the
option is in-the-money
What was the original Black-Scholes-Merton model designed to value? - CORRECT
ANSWER - A European option on a stock providing no dividends
Which of the following is true when dividends are expected? - CORRECT ANSWER -
The Black-Scholes-Merton model can be adjusted by subtracting the present value of expected
dividends from the stock price
Which of the following describes delta? - CORRECT ANSWER - The ratio of a change in
the option payoff to the corresponding change in the stock price
An abandonment option, in effect, - CORRECT ANSWER - Limits the downside risk of
an investment project
, The following are examples of expansion options: - CORRECT ANSWER - I) A mining
company acquires mineral rights to land that is not worth developing today but could be
profitable if ore prices increase.
II) A film studio acquires the rights to produce a film based on the novel.
III) A real estate developer acquires a parcel of land that could be turned into a shopping mall.
IV) A pharmaceutical company purchases a patent to market a new drug.
In real options, the required investment is considered the exercise price. - CORRECT
ANSWER - True
In terms of real options, foregone cash flows from the project play the same role as: - CORRECT
ANSWER - Dividends
Which of the following are examples of real options? - CORRECT ANSWER - I) the
option to expand if an investment project succeeds;
II) the option to wait (and learn) before investing;
III) the option to shrink or abandon a project;
IV) the option to vary the mix of output or the firm's production methods
Production facilities that are flexible, in terms of the potential to use different combinations of
raw material inputs, are most valuable when: - CORRECT ANSWER - Raw material
prices are highly volatile
The value of flexibility is lowest when - CORRECT ANSWER - Uncertainty is low and
managers cannot react to new information.
The following are practical challenges in applying real-options analysis: - CORRECT
ANSWER - I) Real options can be complex.
II) The real options problems may not be well structured.
III) Competition may reduce or change the value of real options.
