Question 1: Which of the following statements is CORRECT?

• Put options give investors the right to buy a stock at a certain strike price before a specified date.
• Call options give investors the right to sell a stock at a certain strike price before a specified date.
• Options typically sell for less than their exercise value.
• LEAPS are very short-term options that were created relatively recently and now trade in the market.
• An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.

Question 2: Which of the following statements is CORRECT?

• 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.
• Call options generally sell at a price less than their exercise value.
• If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
• 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.
• 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.

Question 3:Which of the following statements is CORRECT?

• An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
• As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
• Issuing options provides companies with a low cost method of raising capital.
• The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
• The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.

Question 4: The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

• $2.43
• $2.70
• $2.99
• $3.29
• $3.62

Question 5: An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:

The price of the stock is $40.

The strike price of the option is $40.

The option matures in 3 months (t = 0.25).

The standard deviation of the stock's returns is 0.40, and the variance is 0.16.

The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:

d1 = 0.175

d2 = -0.025

N(d1) = 0.56946

N(d2) = 0.49003

N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black- Scholes model, what is the value of the call option?

• $2.81
• $3.12
• $3.47
• $3.82
• $4.20