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The market price of NM stock has been volatile recently. Since you think the volatility will continue, you purchase a two-month European NM call option with a strike price of $30 and an option price of $.60. You also purchase a two-month European NM put option with a strike price of $30 and an option price of $1.20. What will be your net profit on these option positions if the stock price is $28 on the day the options expire? Ignore trading costs and taxes.


A) −$60
B) $20
C) $0
D) −$20
E) $60

F) A) and D)
G) A) and E)

Correct Answer

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You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The options were exercised today when the market price was $38.60 a share. What is your net profit on this investment? Ignore transaction costs and taxes.


A) −$510
B) −$400
C) $300
D) $850
E) $1,160

F) All of the above
G) A) and B)

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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.

F) A) and B)
G) A) and C)

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Su Lee wrote three call option contracts with a strike price of $22.50 and an option price of $.55 per share. What is the net profit on this investment if the price of the underlying stock is $22.95 per share on the option expiration date? Ignore trading costs and taxes.


A) $10
B) $.30
C) $.10
D) $30
E) $0

F) A) and C)
G) B) and E)

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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.

F) C) and D)
G) A) and E)

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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

F) A) and B)
G) C) and E)

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A convertible bond currently sells for $1,125, has a $1,000 face value, pays interest annually, and matures in six years. The bond is convertible into shares of common stock at a conversion price of $20. How many shares of stock will be received if five bonds are converted?


A) 225
B) 239
C) 200
D) 250
E) 281

F) B) and C)
G) A) and B)

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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

F) A) and E)
G) C) and E)

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Amy is a current shareholder of DJ Industries. She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months. What is this security called that Amy has been given?


A) Convertible bond
B) Warrant
C) Straddle
D) Spread
E) Put

F) A) and C)
G) B) and C)

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Last week, you purchased a call option on a stock with a strike price of $35. The stock price was $33.30 and the option price was $.35 at that time. What is the current intrinsic value per share if the stock is now selling at $36.60 a share?


A) $1.25
B) $1.95
C) $1.60
D) −$3.30
E) $0

F) None of the above
G) C) and E)

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You recently purchased six put option contracts on a stock with an exercise price of $45 and an option premium of $.65. What is the total intrinsic value of these contracts if the stock is currently selling for $46.20 a share?


A) −$360
B) −$120
C) $0
D) $420
E) $750

F) A) and C)
G) All of the above

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Suppose the current share price of Dimension stock is $46. One year from now, this stock will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share value of a Dimension call option if the exercise price is $40 per share and the expiration is one year from now?


A) $7.90
B) $8.48
C) $12.00
D) $10.39
E) $13.62

F) C) and D)
G) C) and E)

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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.

F) A) and B)
G) A) and C)

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Les sold a one-month European $25 call and a one-month European $25 put on ABC stock. The call price per share is $.70 and the put price per share is $1.80. What will be the net profit on these option positions if the stock price is $23 on the day the options expire? Ignore trading costs and taxes.


A) $110
B) −$50
C) −$110
D) $50
E) $20

F) B) and E)
G) A) and D)

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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

F) A) and B)
G) C) and D)

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A $1,000 convertible debenture has a conversion price of $75 per share, an annual coupon payment of $55, and a related stock price of $72.40 a share. What is the conversion value of this bond?


A) $1,055.00
B) $1,052.40
C) $1,000.00
D) $965.33
E) $992.68

F) A) and B)
G) B) and D)

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D

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

F) C) and D)
G) A) and C)

Correct Answer

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Lucinda owns a $1,000 face value convertible bond that matures in six years, has a coupon rate of 6.5 percent, paid annually, and a conversion price of $17.50. Similar bonds have a current market return of 6.35 percent while the related stock is priced at $18.03 per share. What is the conversion value of this bond?


A) $1,007.30
B) $1,028.45
C) $996.11
D) $1,030.29
E) $1,000.00

F) A) and C)
G) C) and D)

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D

QLM stock is currently selling for $28.60 a share. The December 25 call is quoted at $1.15 a share compared to $.05 a share for the December 25 put. What is the cost of two December $25 put option contracts on this stock?


A) $.20
B) $.10
C) $5.00
D) $15.00
E) $10.00

F) None of the above
G) D) and E)

Correct Answer

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E

You own one call option with an exercise price of $27.50 on World Wide Stores stock. The stock is currently selling for $28 a share but is expected to sell for either $26 or $30 a share in one year. The risk-free rate of return is 3.65 percent and the inflation rate is 3.2 percent. What is the current call option price if the option expires one year from now?


A) $1.55
B) $1.75
C) $1.37
D) $1.46
E) $1.82

F) A) and E)
G) A) and B)

Correct Answer

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