Q&A Hero

Q: Which one of the following considers all of the options implicit in a project? A) Expansion planning B) Contingency planning C) Asset management review D) Prospective evaluation E) Strategic evaluation

Q: Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the expectations, the company can opt to increase the store's size. If it underperforms, the company can close the store. These choices are called: A) call options. B) put options. C) straddles. D) managerial options. E) executive options.

Q: The investment timing decision refers to the: A) determination of when an option should be exercised. B) decision of when to purchase an option on an underlying asset. C) analysis of determining when an asset should be sold. D) determination of when a project should be abandoned. E) evaluation of the optimal time to commence a project.

Q: Which one of the following terms applies to an option that has an office building as its underlying asset? A) Financial option B) Implicit option C) Fixed option D) Real option E) Concrete option

Q: Once a project commences, management can select all of the following options except the option to: A) abandon. B) suspend. C) contract. D) expand. E) wait.

Q: Three months ago, Toy Town introduced a new toy for preschool children. The store expected this toy to be an instant success and a fast-moving item. To their surprise, children have zero interest in this toy so sales have been abysmal. Which one of the following options should Toy Town consider in respect to this toy? A) Suspension B) Expansion C) Abandonment D) Contraction E) Re-introduction

Q: Last month, Fun Time introduced a new board game. Consumer demand has been overwhelming and it appears that strong demand will exist over the long term as all ages absolutely love the game. Given this, which one of the following options should the company consider in respect to this game? A) Suspension B) Expansion C) Abandonment D) Contraction E) Withdrawal

Q: Which one of the following is an example of a strategic option for a current restaurant? A) Opening a new restaurant with a different look and an entirely different menu to see if that restaurant appeals to the public B) Deciding to close one hour earlier during the winter months due to slow sales C) Abandoning a menu item based on customer complaints D) Deciding to open only two new locations next year instead of the five that were originally scheduled E) Deciding to create separate lunch and dinner menus rather than have them combined on one menu

Q: Ignoring each of the following may cause the NPV of a project to be underestimated except for the option to: A) abandon. B) expand. C) wait. D) contract. E) commence immediately.

Q: Valuing the option to wait: A) can result in a negative option value. B) assumes the NPV of a project commenced today is negative. C) is unaffected by a project's discount rate. D) is dependent upon a wait time of three years or less. E) requires at least two NPV calculations as of Time 0.

Q: Jack and Jill are house hunting and find a house (House A) they really like but want to continue searching the market for one more week before making the final decision to buy House A. To avoid having someone else purchase House A while they continue their house hunting, they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and Jill have a ________ on House A. A) financial put option B) financial call option C) warrant D) real put option E) real call option

Q: Delta Importers has a pure discount loan with a face value of $180,000 due in one year. The assets of the firm are currently worth $215,000. The shareholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________. A) put; $180,000 B) put; $265,000 C) warrant; $265,000 D) call; $180,000 E) call; $265,000

Q: When underwater employee stock options are exchanged, the option holder generally receives: A) a smaller number of new options with a lower exercise price. B) a cash payment equal to the value of the options when they were originally issued. C) twice the number of options with an exercise price equal to half of the original exercise price. D) a larger number of new options with a higher exercise price. E) the same number of options but with a higher exercise price.

Q: The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within ________ days of the grant. A) 2 calendar B) 2 business C) 7 calendar D) 30 business E) 45 calendar

Q: Employee stock options: A) usually have a positive intrinsic value when issued. B) must be backdated at least six months to comply with Sarbanes-Oxley. C) are generally "underwater" when issued. D) are frequently repriced if the options are in-the-money. E) are generally issued with a zero intrinsic value.

Q: Employee stock options are primarily designed to do which one of the following? A) Provide employees with put options on their shares of company stock B) Provide an immediately vested benefit to key employees C) Influence the actions and priorities of employees D) Distribute excess cash to key employees to avoid corporate taxation E) Provide an immediate capital gain to certain employees

Q: Which one of the following statements regarding employee stock options (ESOs) is correct? A) ESOs grant an employee the right to buy a fixed number of shares of company stock at the market price. B) Employees must exercise their ESOs prior to those ESOs becoming vested. C) Employees may forfeit their ESOs if they terminate their employment with the issuing firm. D) If a firm issues ESOs it must make them available to all employees. E) Employees can sell their ESOs if they do not want to personally exercise them.

Q: Suzie is the controller of The Price Rite Company. She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years. Which one of the following has Suzie been granted? A) Employee stock options B) Company bonus options C) Employee grants D) Employee exercise options E) Company benefits options

Q: Which one of the following will decrease the value of an American call option? A) A decrease in the price volatility of the underlying asset B) An increase in time to expiration C) An increase in the underlying stock price D) A decrease in the exercise price E) An increase in the risk-free rate of return

Q: Which one of the following will decrease the value of an American call option? A) A decrease in the value of the underlying security B) An increase in the risk-free rate C) A decrease in the exercise price D) An increase in the price volatility of the underlying asset E) An increase in the time to expiration

Q: Which one of the following terms applies to the value of an option on its expiration date? A) Strike price B) Upper limit C) Deadline price D) Time value E) Intrinsic value

Q: Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-money, then the put will: A) finish in-the-money. B) finish at-the-money. C) finish out-of-the-money. D) either finish at-the-money or in-the-money. E) either finish at-the-money or out-of-the-money.

Q: Mark owns both a March $20 put and a March $20 call on Alpha stock. Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs. A) A price decrease in Alpha stock will increase the value of Mark's call option. B) A March $30 call is worth more than Mark's $20 call. C) The time premium on an April $20 put is less than the time premium on Mark's put. (Assume both puts expire in the same calendar year.) D) A price increase in Alpha stock from $26 to $28 will increase the value of Mark's put. E) If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call must either decrease by $1 or equal zero.

Q: Which one of the following statements is correct? A) The value of a call decreases as the price of the underlying stock increases. B) The value of a call increases as the exercise price decreases. C) The value of a put increases as the price of the underlying stock increases. D) The value of a put decreases as the exercise price increases. E) The intrinsic value of a put must be zero on the expiration date.

Q: Which one of the following describes the intrinsic value of a put option? A) Lesser of the strike price or the stock price B) Lesser of the stock price minus the exercise price or zero C) Lesser of the stock price or zero D) Greater of the strike price minus the stock price or zero E) Greater of the stock price minus the exercise price or zero

Q: Which one of the following describes the intrinsic value of a call option? A) The call's upper bound value B) The call's lower bound value C) Market price of the underlying security D) Zero, if the call is in-the-money E) The strike price

Q: Which one of the following describes the lower bound of a call's value? A) Strike price or zero, whichever is greater B) Stock price minus the exercise price or zero, whichever is greater C) Strike price or the stock price, whichever is lower D) Strike price or zero, whichever is lower E) Stock price minus the exercise price or zero, whichever is lower

Q: The maximum value of a call option can never exceed the: A) underlying stock price. B) exercise price plus the stock price. C) strike price. D) premium price. E) intrinsic value.

Q: A $20 put option on Wildwood stock expires today. The current price of the stock is $18.50. Which one of the following best describes this option? A) Funded B) Unfunded C) At-the-money D) In-the-money E) Out-of-the-money

Q: You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option? A) Worthless B) Unfunded C) Expired D) In-the-money E) Out-of-the-money

Q: The primary difference between an American call option and a European call option is the fact that the American call: A) has a fixed strike price while the European strike price varies over time. B) is a right to buy while a European call is an obligation to buy. C) has an expiration date while the European call does not. D) is written on 100 shares of the underlying security while the European call covers 10 shares. E) can be exercised at any time prior to expiration while the European call can only be exercised on the expiration date.

Q: Steve owns an option that grants him the right to purchase shares of LK Tool stock at $45 a share. Currently, the stock is selling for $52.40 a share. Steve would like to realize his profits but is not permitted to exercise the option for another two weeks. Which one of the following does Steve own? A) Straight bond B) American call C) American put D) European call E) European put

Q: Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares. Which one of the following did Julie own? A) Warrant B) American call C) American put D) European call E) European put

Q: Jen is the holder of a European call option. Given this, she: A) is obligated to buy if the option is exercised. B) has the right to sell if she chooses to do so. C) has a right to buy but only on the expiration date. D) is obligated to sell if the option is exercised. E) has a right to buy at any time before the option expires.

Q: The owner of an American put option has the ________ an asset at a fixed price during a stated period of time. A) right to sell B) right to buy C) obligation to sell D) obligation to buy E) obligation to trade

Q: A stock currently sells for $34 a share but is expected to increase in value over the next six months to at least $36 a share. Assume there are 6-month options available on this stock with an exercise price of $35. Which of these options should have the most value today? A) European put B) American call C) American and European calls equally D) European call E) American put

Q: Brad purchased an option that he can only exercise on the final day of the option period. Which type of option did he purchase? A) European B) American C) Inflexible D) Dated E) Pointed

Q: What is the maximum amount you can lose if you purchase one call option contract on ABC stock that is currently selling for $16 a share? A) The market price of the stock multiplied by 100 B) The strike price multiplied by 100 C) The strike price per share D) The option premium per share multiplied by 100 E) The option premium per share

Q: Which term applies to the final day on which an option can be exercised? A) Payment date B) Ex-option date C) Opening date D) Expiration date E) Intrinsic date

Q: What is another name for an option's strike price? A) Opening price B) Intrinsic value C) Exercise price D) Market price E) Time value

Q: Elizabeth owns a call option on 100 shares of Microsoft stock and she has just decided to purchase those shares. This purchase is commonly referred to as: A) striking the asset. B) expiring the option. C) exercising the option. D) placing the collar. E) the collar option.

Q: Which one of the following grants its owner the right to buy or to sell an asset at a fixed price at any time during a stated period? A) American option B) Forward contract C) Futures contract D) Swap E) European option

Q: Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $43 and ________ if the price per barrel is $47. A) −$2; $2 B) −$2; $0 C) $0; $2 D) $2; −$2 E) $2; $2

Q: Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $49 and ________ if the price per barrel is $55. A) −$4; $2 B) −$2; $0 C) $0; $2 D) $0; −$4 E) −$2; $4

Q: Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration? A) $330 B) −$330 C) $110 D) −$110 E) $150

Q: You anticipate your firm will need 20,000 bushels of oats in December so you hedged your position today at the closing price when the daily price quotes were: Open 222, High 225.50, Low 223.50, and Settle 218.50. Assume the actual market quote turns out to be 228.70 on the day you actually acquire the oats. Oats futures contracts are based on 5,000 bushels and priced in cents per bushel. What was your gain or loss from hedging your position? A) −$510 B) $2,040 C) $510 D) $1,060 E) −$2,040

Q: Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position? A) $23,200 B) $2,320 C) $0 D) −$2,320 E) −$23,200

Q: You need 70,000 bushels of corn for your production operations next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 371.25 cents per bushel for delivery next month. If you want to hedge your cost, you should ________ contracts at a cost of ________ per contract. A) Buy 12; $2,570 B) Buy 14; $18,562.50 C) Buy 16; $22,570.00 D) Sell 14; $18,562.50 E) Sell 16; $22,570.00

Q: You expect to deliver 50,000 bushels of wheat to the market in July. Assume you hedged your position by selling futures contracts on half of your expected delivery at a price of 443.25. The futures contracts are based on 5,000 bushels and are priced in cents per bushel. Assume the market price turns out to be 445.75 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts? A) $1,250 less B) $625 less C) $0 D) $625 more E) $1,250 more

Q: You decided to speculate in the market and sold six platinum futures contracts when the futures price was $1,391.20 per troy ounce. The price on the contract maturity date was $1,395. The contract size is 50 troy ounces. What was your total profit or loss on the settlement day if you had to cover your position in the spot market? A) $190 B) $1,140 C) −$190 D) $50 E) −$1,140

Q: Futures contracts on gold are based on 100 troy ounces and priced in dollars per troy ounce. Assume the January gold contract settled today at 1285.10 and opened at 1284.60. The April contract settled at 1285.30 and opened at 1285. You own four of the April contracts that you purchased at 1284.70. What is your total profit or loss to date? A) $160 B) $240 C) $40 D) $120 E) $60

Q: Futures contracts on palladium are based on 50 troy ounces and are priced in dollars per troy ounce. Assume today's open price on one May contract was 758.90 and the settle price was 756.10. You own three May contracts which you purchased at a quote of 749.30. What is your total profit or loss to date? A) $1,020 B) −$1,545 C) −$420 D) −$1,020 E) $1,545

Q: Ethanol futures contracts are based on 29,000 gallons and are priced in dollars per gallon. Assume the end-of-day report on a contract show prices of: Open 2.220, High 2.231, Low 2.181, and Settle 2.186. What is the maximum profit that an investor could have earned by buying and selling one of these contracts on this day? A) $1,131 B) $1,450 C) $942 D) $2,436 E) $986

Q: Gold futures contracts are based on 100 troy ounces and are priced in dollars per troy ounce. You own three November contracts. At the end of trading today, the market report reflected these prices: Open 1293.00, High 1295.00, Low 1286.00, and Settle 1296.10. What is the value of your contracts at the market close today? A) $129,610 B) $259,000 C) $258,600 D) $388,830 E) $360,460

Q: Silver futures contracts are based on 5,000 troy ounces and are priced in dollars per troy ounce. Suppose a closing report displays these prices for a December contract: Open 17.435, High 17.450, Low 17.025, and Settle 17.119. What is the closing value for two December futures contracts on silver? A) $174,350 B) $174,500 C) $170,250 D) $171,190 E) $172,770

Q: In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss? A) $20,000 B) $200,000 C) $2,000 D) $200 E) $2,000,000

Q: You would like the right to purchase an interest rate cap in the future. To obtain this right, you should purchase a: A) floor. B) swap. C) caption. D) collar. E) hat.

Q: An interest rate cap is actually a: A) forward contract on interest rates. B) put option on a bond. C) call option on an interest rate. D) deferred interest rate swap. E) put option on an interest rate.

Q: Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded: A) only at the end of day price. B) weekly. C) in eighths. D) in 64ths. E) in 32nds.

Q: The cost to purchase an option contract is called the: A) strike price. B) rights price. C) premium. D) exercise price. E) payoff price.

Q: When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the: A) current options price and the current futures price. B) spot and forward futures prices. C) strike price on the option and the current futures price. D) exercise price and the current options price. E) exercise price and the strike price.

Q: American option contracts: A) are exercised at the discretion of the contract seller. B) obligate the buyer but not the seller. C) can be exercised on any day up to and including the expiration date. D) are marked to market on a daily basis. E) are only available on publicly traded stocks.

Q: Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives? A) Low financial distress costs and constrained access to capital markets B) Small in size and low financial distress costs C) Easy access to capital markets and high financial distress costs D) High financial distress costs and constrained access to capital markets E) High financial distress costs and easy access to capital markets

Q: You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge? A) Buy a call B) Sell a call C) Buy a put D) Sell a put E) No option position will create the desired hedge.

Q: You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct? A) Buying a put B) Selling a call C) Buying a call D) Selling a put E) Selling both a call and a put

Q: Which one of the following statements concerning option payoffs is correct? A) The buyer of a call profits when the exercise price exceeds the market price. B) The buyer of a call profits when the strike price exceeds the exercise price. C) A put will only be exercised if both the seller and the buyer can profit. D) Both the buyer and the seller profit when a call is exercised. E) The seller of a put incurs a loss when a put is exercised.

Q: Which one of the following actions obligates you only on the expiration date to sell an asset at the strike price if the option is exercised? A) Writing an American call B) Buying an American put C) Writing a European call D) Buying a European put E) Entering a European swap

Q: Which one of the following actions will provide you with the right, but not the obligation, to sell the underlying asset at a specified price during a specified period of time? A) Purchase of a call option B) Sale of a call option C) Purchase of a put option D) Sale of a put option E) Swap

Q: If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always: A) remain constant at the average of the floor and cap rates. B) remain constant at the floor rate. C) remain constant at the cap rate. D) be higher than, or equal to, the cap but lower than, or equal to, the floor. E) be higher than, or equal to, the floor but lower than, or equal to, the cap.

Q: A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm? A) Create an interest rate collar B) Create an interest rate floor C) Buy a put option on interest rates D) Enter a currency futures contract E) Buy a put option on a bond

Q: The buyer of an option contract: A) receives the option premium in exchange for an obligation to either buy or sell an underlying asset. B) pays an option premium in exchange for a right to buy or sell an underlying asset during a specified period of time. C) pays the strike price at the time the option is purchased and in exchange receives the right to exercise the option at any time during the option period. D) receives the option premium in exchange for guaranteeing the purchase or sale of an underlying asset if called upon to do so. E) pays the option premium in exchange for receiving the strike price at a later date.

Q: A call option contract: A) obligates both the buyer and the seller. B) obligates the buyer but not the seller. C) grants rights to the buyer and obligates the seller. D) grants rights to the seller and obligates the buyer. E) grants rights to both the buyer and the seller but does not obligate either party.

Q: Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile? A) Purchased a call option B) Purchased a put option C) Sold a call option D) Sold a put option E) Purchased and simultaneously sold the same call option

Q: Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation? A) Purchased a call option B) Purchased a put option C) Purchased and simultaneously sold the same call option D) Sold a call option E) Sold a put option

Q: An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) ________ contract. A) option B) forward C) futures D) swap E) spot

Q: Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed rate. Given this information, which one of the following statements is correct? A) After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent. B) Both companies can profit in a swap that will allow Murray's to pay a variable rate of prime plus one percent. C) Fred's will end up with a fixed rate of 10 percent. D) Fred's has the best chance of profiting if it does a currency swap with Murray's. E) There are no terms under which Murray's and Fred's can swap interest rates.

Q: Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus .5 percent. Cat's can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a variable rate. Given this information, which one of the following statements is correct? A) After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent. B) Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's. C) Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus .75 percent variable rate. D) Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's. E) Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.

Q: Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus .5 percent or a fixed rate of 8 percent. Company A prefers a variable rate and Company B prefers a fixed rate. Which one of the following statements depicts the most favorable outcome of a swap between Companies A and B? A) Company A could pay a fixed rate of 7.25 percent. B) Company A could pay a fixed rate of 7.75 percent. C) Company B could pay a fixed rate of 8 percent. D) Company B could pay the variable prime rate + 1 percent. E) Company A could pay the variable prime rate + .75 percent.

Q: A swap dealer in the U.S.: A) acts solely as a seller of swap contracts. B) matches buyers to sellers. C) only deals if its book is matched. D) is frequently a commercial bank. E) trades electronically via NASDAQ.

Q: Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a commodity swap contract? A) Setting a permanent price at which a commodity will be traded B) Setting the price at the minimum spot price during a given period of time C) Setting the price equal to the spot price on the delivery date D) Using the average market price over a given period of time E) Setting the contract price equal to some percentage, less than 100 percent, of the market price on any given day