Strayer FIN534 Week 5 Homework Assignment Chapter 8

FIN 534 Week 5 Homework
Assignment Chapter 8
1. An investor who writes
standard call options against stock held in his or her portfolio is said to be
selling what type of options?
a. Put
b. Naked
c. Covered
d. Out-of-the-money
e. In-the-money
2. Cazden Motors’ stock is
trading at $30 a share. Call options on the company’s stock are also available,
some with a strike price of $25 and some with a strike price of $35. Both
options expire in three months. Which of the following best describes the value
of these options?
a. The options with the $25
strike price will sell for less than the options with the $35 strike price.
b. The options with the $25
strike price have an exercise value greater than $5.
c. The options with the $35
strike price have an exercise value greater than $0.
d. If Cazden’s stock price rose
by $5, the exercise value of the options with the $25 strike price would also
increase by $5.
e. The options with the $25
strike price will sell for $5.
3. Braddock Construction Co.’s
stock is trading at $20 a share. Call options that expire in three months with
a strike price of $20 sell for $1.50. Which of the following will occur if the
stock price increases 10%, to $22 a share?
a. The price of the call option
will increase by more than $2.
b. The price of the call option
will increase by less than $2, and the percentage increase in price will be
less than 10%.
c. The price of the call option
will increase by less than $2, but the percentage increase in price will be
more than 10%.
d. The price of the call option
will increase by more than $2, but the percentage increase in price will be
less than 10%.
e. The price of the call option
will increase by $2.
4. Which of the following statements
is CORRECT?
a. Call options generally sell at
a price greater than their exercise value, and the greater the exercise value,
the higher the premium on the option is likely to be.
b. Call options generally sell at
a price below their exercise value, and the greater the exercise value, the
lower the premium on the option is likely to be.
c. Call options generally sell at
a price below their exercise value, and the lower the exercise value, the lower
the premium on the option is likely to be.
d. Because of the put-call parity
relationship, under equilibrium conditions a put option on a stock must sell at
exactly the same price as a call option on the stock.
e. If the underlying stock does
not pay a dividend, it does not make good economic sense to exercise a call
option prior to its expiration date, even if this would yield an immediate
profit.
5. Which of the following
statements is CORRECT?
a. Call options generally sell at
a price less than their exercise value.
b. If a stock becomes riskier (more
volatile), call options on the stock are likely to decline in value.
c. Call options generally sell at
prices above their exercise value, but for an in-the-money option, the greater
the exercise value in relation to the strike price, the lower the premium on
the option is likely to be.
d. Because of the put-call parity
relationship, under equilibrium conditions a put option on a stock must sell at
exactly the same price as a call option on the stock.
e. If the underlying stock does
not pay a dividend, it makes good economic sense to exercise a call option as
soon as the stock’s price exceeds the strike price by about 10%, because this
permits the option holder to lock in an immediate profit