Fin 480 Final Pool Exam Questions and
Answers Graded A+
An out-of-the-money call option is best defined as an option that: - Correct answer-
Should not be excersised
Hi-Tech announces a major expansion which causes the price of its stock to
increase and also causes an increase in the volatility of the stock price. How will
these two market reactions affect the value of put options on Hi-Tech stock? -
Correct answer-The reactions will have offsetting effects on put option prices.
A put option with a $35 exercise price on ABC stock expires today. The current
price of ABC stock is $36. The put is: - Correct answer-Out of the money
The intrinsic value of a put is equal to the: - Correct answer-greater of the strike
price minus the stock price or zero
If you consider stockholders to be the owners of a firm, then those stockholders: -
Correct answer-own a put option on the firm with an exercise price equal to the
firm's total debt
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,Hi-Tech announces a major expansion which causes the price of its stock to
increase and also causes an increase in the volatility of the stock price. How will
these two market reactions affect the value of call options on Hi-Tech stock? -
Correct answer-Both reactions increase the value of the call options.
The lower bound on a call's value is defined as the - Correct answer-greater of the
stock price minus the exercise price or zero.
Put-call parity can be used to show: - Correct answer-the precise relationship
between put and call prices given equal exercise prices and equal expiration dates.
If you consider bondholders to be the owners of a firm, then those bondholders: -
Correct answer-have written a call option on the firm with an exercise price equal
to the firm's total debt.
The intrinsic value of a call equals the: - Correct answer-lower bound of the call's
value.
You sold ten put option contracts on PLT stock with an exercise price of $32.50
and an option price of $1.10. Today, the option expires when the underlying stock
is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total
profit on this investment? - Correct answer-- $1,100
- Total profit = 10 ×100 ×$1.10 = $1,100;
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,- The option finished out of the money.
At expiration, the maximum price of a ____ is the greater of the: - Correct answer-
call; stock price minus the exercise price, or 0.
Jamp;L stock has a current market price of $47.60 a share. The one-year call on
Jamp;L stock with a strike price of $45 is priced at $3.20 while the one-year put
with a strike price of $45 is priced at $.15. What is the risk-free rate of return? -
Correct answer-- 1.01%
- Using put-call parity: S + P = C + PV(E) PV(E) = $45 / (1 + r) = $47.60 + .15 -
3.20 r = .0101, or 1.01%
GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike
price of $30 is priced at $3.55. Risk-free assets are currently returning .3 percent
per month. What is the price of a 4-month put on GSX stock with a strike price of
$35? - Correct answer-- $5.73
- Using put-call parity: S + P = C + PV(E) P = $3.55 + ($.0034) - $32.40 =
$5.73
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.
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, The stockholders in this firm basically own a _____ option on the assets of the firm
with a strike price of ______ - Correct answer-call; $50,000.
A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to
the bond's par value? A. $1,062.00 - Correct answer-- ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium
$1,062 = MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
A convertible bond is selling for $800, matures in 10 years, has a face value of
$1,000, and a coupon rate of 10 percent. Similar nonconvertible bonds are priced
to yield 14 percent. The conversion price is $42.50. The stock currently sells for
$31.30 a share. What is the conversion premium? - Correct answer-- 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
A firm has experienced a significant increase in its share value. In retrospect,
which one of the following securities would generally have provided the most
benefit to the firm assuming the securities had been issued prior to the change in
share value? - Correct answer-ANSD. straight bonds
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Answers Graded A+
An out-of-the-money call option is best defined as an option that: - Correct answer-
Should not be excersised
Hi-Tech announces a major expansion which causes the price of its stock to
increase and also causes an increase in the volatility of the stock price. How will
these two market reactions affect the value of put options on Hi-Tech stock? -
Correct answer-The reactions will have offsetting effects on put option prices.
A put option with a $35 exercise price on ABC stock expires today. The current
price of ABC stock is $36. The put is: - Correct answer-Out of the money
The intrinsic value of a put is equal to the: - Correct answer-greater of the strike
price minus the stock price or zero
If you consider stockholders to be the owners of a firm, then those stockholders: -
Correct answer-own a put option on the firm with an exercise price equal to the
firm's total debt
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,Hi-Tech announces a major expansion which causes the price of its stock to
increase and also causes an increase in the volatility of the stock price. How will
these two market reactions affect the value of call options on Hi-Tech stock? -
Correct answer-Both reactions increase the value of the call options.
The lower bound on a call's value is defined as the - Correct answer-greater of the
stock price minus the exercise price or zero.
Put-call parity can be used to show: - Correct answer-the precise relationship
between put and call prices given equal exercise prices and equal expiration dates.
If you consider bondholders to be the owners of a firm, then those bondholders: -
Correct answer-have written a call option on the firm with an exercise price equal
to the firm's total debt.
The intrinsic value of a call equals the: - Correct answer-lower bound of the call's
value.
You sold ten put option contracts on PLT stock with an exercise price of $32.50
and an option price of $1.10. Today, the option expires when the underlying stock
is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total
profit on this investment? - Correct answer-- $1,100
- Total profit = 10 ×100 ×$1.10 = $1,100;
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,- The option finished out of the money.
At expiration, the maximum price of a ____ is the greater of the: - Correct answer-
call; stock price minus the exercise price, or 0.
Jamp;L stock has a current market price of $47.60 a share. The one-year call on
Jamp;L stock with a strike price of $45 is priced at $3.20 while the one-year put
with a strike price of $45 is priced at $.15. What is the risk-free rate of return? -
Correct answer-- 1.01%
- Using put-call parity: S + P = C + PV(E) PV(E) = $45 / (1 + r) = $47.60 + .15 -
3.20 r = .0101, or 1.01%
GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike
price of $30 is priced at $3.55. Risk-free assets are currently returning .3 percent
per month. What is the price of a 4-month put on GSX stock with a strike price of
$35? - Correct answer-- $5.73
- Using put-call parity: S + P = C + PV(E) P = $3.55 + ($.0034) - $32.40 =
$5.73
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.
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, The stockholders in this firm basically own a _____ option on the assets of the firm
with a strike price of ______ - Correct answer-call; $50,000.
A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to
the bond's par value? A. $1,062.00 - Correct answer-- ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium
$1,062 = MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
A convertible bond is selling for $800, matures in 10 years, has a face value of
$1,000, and a coupon rate of 10 percent. Similar nonconvertible bonds are priced
to yield 14 percent. The conversion price is $42.50. The stock currently sells for
$31.30 a share. What is the conversion premium? - Correct answer-- 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
A firm has experienced a significant increase in its share value. In retrospect,
which one of the following securities would generally have provided the most
benefit to the firm assuming the securities had been issued prior to the change in
share value? - Correct answer-ANSD. straight bonds
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
