FM14e-TB-CHAPTER 8 FINANCIAL OPTIONS AND APPLICATIONS IN CORPORATE FINANCE
1. An option is a contract that gives its holder the right to buy or sell an
... [Show More] asset at a
predetermined price within a specified period of time.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Options KEY: Bloom’s: Knowledge
2. The strike price is the price that must be paid for a share of common stock when it is
bought by exercising a warrant.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Strike price KEY: Bloom’s: Knowledge
3. The exercise value is the positive difference between the current price of the stock and
the strike price. The exercise value is zero if the stock's price is below the strike price.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Exercise value KEY: Bloom’s: Knowledge
4. The exercise value is also called the strike price, but this term is generally used when
discussing convertibles rather than financial options.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Exercise value KEY: Bloom’s: Knowledge
5. As the price of a stock rises above the strike price, the value investors are willing to
pay for a call option increases because both (1) the immediate capital gain that can be realized by
exercising the option and (2) the likely exercise value of the option when it expires have both
increased.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Option time value KEY: Bloom’s: Knowledge
6. If the current price of a stock is below the strike price, then an option to buy the stock
is worthless and will have a zero value.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives
LOC: TBA TOP: Option pricing KEY: Bloom’s: Knowledge
7. If the market is in equilibrium, then an option must sell at a price that is exactly equal
to the difference between the stock's current price and the option's strike price.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Derivatives [Show Less]