Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy those shares

1.	Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?    A.  option B.  forward contract C.  futures contract D.  swap E.  intrinsic contract Refer to section 24.1

2.	Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy those shares. This purchase is commonly referred to as:    A.  striking the asset. B.  expiring the option. C.  exercising the option. D.  putting the collar. E.  the collar option. Refer to section 24.1

3.	Marti owns an option that allows him to purchase ABC stock at $50 a share. The $50 price is referred to as the:    A.  opening price. B.  intrinsic value. C.  strike price. D.  market price. E.  time value. Refer to section 24.1

4.	What is the final day on which an option can be exercised called?    A.  payment date B.  ex-option date C.  opening date D.  expiration date E.  intrinsic date Refer to section 24.1

The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months

61.

You sold one call option contract with a strike price of $55 when the option was quoted at $0.80. The option expires today when the value of the underlying stock is $53.70. Ignoring trading costs and taxes, what is the net profit or loss on this investment?    A.  -$250 B.  -$80 C.  $0 D.  $50 E.  $80 Total profit = $0.80 × 100 × 1 = $80. The call finished out-of-the-money.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Call payoff

62.	You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $38.10 on the option expiration date?    A.  -$510 B.  -$90 C.  $90 D.  $510 E.  $930 Total loss = ($1.40 + $35 - $38.10) × 100 × 3 = -$510

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Call payoff

63.

You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?    A.  -$2,840 B.  -$1,760 C.  -$1,080 D.  $1,080 E.  $1,760 Net profit = $1.35 × 100 × 8 = $1,080. The call finished out-of-the-money.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Call payoff

64.

The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months. Thus, you decide to purchase a two-month European call option on this stock with a strike price of $45 and an option price of $2.00. You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.30. What will be your net profit or loss on these option positions if the stock price is $48 on the day the options expire? Ignore trading costs and taxes.    A.  -$30 B.  $70 C.  $80 D.  $270 E.  $330 Net profit = [(-$2.00 + $48 - $45) × 100] + [-$0.30 × 100] = $70

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time

1.

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?    A.  abating B.  deriving C.  hedging D.  forwarding E.  manipulating Refer to section 23.2

2.	The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:    A.  forward agreement. B.  derivative security. C.  mezzanine asset. D.  contingent security. E.  junior security. Refer to section 23.2

3.

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?    A.  exchange line B.  net present value profile C.  risk profile D.  market line E.  return grid Refer to section 23.2

4.

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?    A.  futures risk B.  volatility exposure C.  surplus risk D.  transactions exposure E.  translation exposure Refer to section 23.2

Amy is the chief financial officer of a retail toy store. Recently, she decided that the firm should expand its operations

1.

Amy is the chief financial officer of a retail toy store. Recently, she decided that the firm should expand its operations and open two additional stores. Within a very brief period, it was obvious that Amy had made a very bad decision in opening those stores, given that the economy is in the middle of a severe recession. In reflecting back on her decision, Amy realizes that she made a bad decision due to a reasoning error. Which one of the following areas of study best applies to this situation?    A.  corporate ethics B.  financial statement analysis C.  managerial finance D.  debt management E.  behavioral finance Refer to section 22.1

2.

Peter has successfully managed the finances of A.D. Leadbetter in a manner that has yielded abnormally high returns. Due to this success, Peter has decided to publish a newsletter for financial executives so that he can share his superior financial wisdom with others. There is a very real probability that Peter has which one of the following characteristics?    A.  gambler's fallacy B.  frame dependence C.  overconfidence D.  representativeness heuristic E.  sentiment-based risk attitudes Refer to section 22.2

3.

Anytime Ted analyzes a proposed project, he always assigns a much higher probability of success to the project than is warranted by the information he has gathered. Ted suffers from which one of the following?    A.  frame dependence B.  overconfidence C.  gambler's fallacy D.  confirmation bias E.  overoptimism Refer to section 22.2

4.

The tendency for a decision maker to search for confirmation that a recent decision he or she made was a good decision represents which one of the following characteristics?    A.  overconfidence B.  overoptimism C.  affect heuristic D.  confirmation bias E.  representativeness heuristic Refer to section 22.2