Chapter 25 - Option Valuation

Chapter 25
Option Valuation

Multiple Choice Questions

1. Travis owns a stock that is currently valued at $45.8 a share. !e is concerned that the
stock price "ay decline so he #ust purchased a put option on the stock with an e$ercise price
o% $45. &hich one o% the %ollowin' ter"s applies to the strate'y Travis is usin'(
). put-call parity
*. covered call
C. protective put
+. straddle
,. stran'le

2. -ut-call parity is de%ined as the relationship .etween which o% the %ollowin' varia.les(
/. risk-%ree asset
//. underlyin' stock price
///. call option
/V. put option
). / and // only
*. // and /// only
C. //0 ///0 and /V only
+. /0 //0 and /// only
,. /0 //0 ///0 and /V

1. )ssu"e the price o% &estward Co. stock increases .y one percent. &hich one o% the
%ollowin' "easures the e%%ect that this chan'e in the stock price will have on the value o% the
&estward Co. options(
). theta
*. ve'a
C. rho
+. delta
,. 'a""a

25-1
Chapter 25 - Option Valuation
4. &hich one o% the %ollowin' de%ines the relationship .etween the value o% an option and the
option2s ti"e to e$piration(
). theta.
*. ve'a.
C. rho.
+. delta.
,. 'a""a.

5. )ssu"e the standard deviation o% the returns on )*C stock increases. The e%%ect o% this
chan'e on the value o% the call options on )*C stock is "easured .y which one o% the
%ollowin'(
). theta.
*. ve'a.
C. rho.
+. delta.
,. 'a""a.

3. The sensitivity o% an option2s value to a chan'e in the risk-%ree rate is "easured .y which
one o% the %ollowin'(
). theta.
*. ve'a.
C. rho.
+. delta.
,. 'a""a.

4. The i"plied volatility o% the returns on the underlyin' asset that is co"puted usin' the
*lack-5choles option pricin' "odel is re%erred to as which one o% the %ollowin'(
). residual error
*. i"plied "ean return
C. derived case volatility 6+CV7
+. %orecast rho
,. i"plied standard deviation 6/5+7

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Chapter 25 - Option Valuation
8. )"y #ust purchased a ri'ht to .uy 1 shares o% 898 stock %or $15 a share on :une 20
2;. &hich one o% the %ollowin' did )"y purchase(
). )"erican delta
*. )"erican call
C. )"erican put
+. ,uropean put
,. ,uropean call

;. &hich one o% the %ollowin' provides the option o% sellin' a stock anyti"e durin' the option
period at a speci%ied price even i% the "arket price o% the stock declines to <ero(
). )"erican call
*. ,uropean call
C. )"erican put
+. ,uropean put
,. either an )"erican or a ,uropean put

1. &hich one o% the %ollowin' .est de%ines the pri"ary purpose o% a protective put(
). ensure a "a$i"u" purchase price in the %uture
*. o%%set an e=uivalent call option
C. li"it the downside risk o% asset ownership
+. lock in a risk-%ree rate o% return on a %inancial asset
,. increase the upside potential return on an invest"ent

11. &hich one o% the %ollowin' acts like an insurance policy i% the price o% a stock you own
suddenly decreases in value(
). sale o% a ,uropean call option
*. sale o% an )"erican put option
C. purchase o% a protective put
+. purchase o% a protective call
,. either the sale or purchase o% a put

25-1
Chapter 25 - Option Valuation
12. &hich one o% the %ollowin' can .e used to replicate a protective put strate'y(
). riskless invest"ent and stock purchase
*. stock purchase and call option
C. call option and riskless invest"ent
+. riskless invest"ent
,. call option0 stock purchase0 and riskless invest"ent

11. >iven the 617 e$ercise price ,0 627 ti"e to "aturity T0 and 617 ,uropean put-call parity0 the
present value o% , plus the value o% the call option is e=ual to the?
). current "arket value o% the stock.
*. present value o% the stock "inus the value o% the put.
C. value o% the put "inus the "arket value o% the stock.
+. value o% a risk-%ree asset.
,. stock value plus the put value.

14. &hich one o% the %ollowin' will provide you with the sa"e value that you would have i%
you #ust purchased *)T stock(
). sell a put option on *)T stock and invest at the risk-%ree rate o% return
*. .uy .oth a call option and a put option on *)T stock and also lend out %unds at the risk-
%ree rate
C. sell a put and .uy a call on *)T stock as well as invest at the risk-%ree rate o% return
+. lend out %unds at the risk-%ree rate o% return and sell a put option on *)T stock
,. .orrow %unds at the risk-%ree rate o% return and invest the proceeds in e=uivalent a"ounts o%
put and call options on *)T stock

15. @nder ,uropean put-call parity0 the present value o% the strike price is e=uivalent to?
). the current value o% the stock "inus the call pre"iu".
*. the "arket value o% the stock plus the put pre"iu".
C. the present value o% a 'overn"ent coupon .ond with a %ace value e=ual to the strike price.
+. a @.5. Treasury .ill with a %ace value e=ual to the strike price.
,. a risk-%ree security with a %ace value e=ual to the strike price and a coupon rate e=ual to the
risk-%ree rate o% return.

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Chapter 25 - Option Valuation
13. Traci wants to have $130 si$ years %ro" now and wants to deposit #ust one lu"p su"
a"ount today. The annual percenta'e rate applica.le to her invest"ent is 3.8 percent. &hich
one o% the %ollowin' "ethods o% co"poundin' interest will allow her to deposit the least
a"ount possi.le today(
). annual
*. daily
C. =uarterly
+. "onthly
,. continuous

14. The seller o% a ,uropean call option has the?
). ri'ht0 .ut not the o.li'ation0 to .uy a stock at a speci%ied price on a speci%ied date.
*. ri'ht to .uy a stock at a speci%ied price durin' a speci%ied period o% ti"e.
C. o.li'ation to sell a stock on a speci%ied date .ut only at the speci%ied price.
+. o.li'ation to .uy a stock so"e ti"e durin' a speci%ied period at the speci%ied price.
,. o.li'ation to .uy a stock at the lower o% the e$ercise price or the "arket price on the
e$piration date.

18. /n the *lack-5choles option pricin' %or"ula0 A6d17 is the pro.a.ility that a standardi<ed0
nor"ally distri.uted rando" varia.le is?
). less than or e=ual to A6d27.
*. less than one.
C. e=ual to one.
+. e=ual to d1.
,. less than or e=ual to d1.

1;. /n the *lack-5choles "odel0 the sy".ol BB is used to represent the standard deviation o%
the?
). option pre"iu" on a call with a speci%ied e$ercise price.
*. rate o% return on the underlyin' asset.
C. volatility o% the risk-%ree rate o% return.
+. rate o% return on a risk-%ree asset.
,. option pre"iu" on a put with a speci%ied e$ercise price.

25-5
Chapter 25 - Option Valuation
2. &hich o% the %ollowin' a%%ect the value o% a call option(
/. strike price
//. ti"e to "aturity
///. standard deviation o% the returns on a risk-%ree asset
/V. risk-%ree rate
). / and /// only
*. // and /V only
C. /0 //0 and /V only
+. //0 ///0 and /V only
,. /0 //0 ///0 and /V

21. To co"pute the value o% a put usin' the *lack-5choles option pricin' "odel0 you?
). %irst have to apply the put-call parity relationship.
*. %irst have to co"pute the value o% the put as i% it is a call.
C. co"pute the value o% an e=uivalent call and then su.tract that value %ro" one.
+. co"pute the value o% an e=uivalent call and then su.tract that value %ro" the "arket price
o% the stock.
,. co"pute the value o% an e=uivalent call and then "ultiply that value .y e
-CT
.

22. &hich one o% the %ollowin' state"ents is correct(
). The price o% an )"erican put is e=ual to the stock price "inus the e$ercise price.
*. The value o% a ,uropean call is 'reater than the value o% a co"para.le )"erican call.
C. The value o% a put is e=ual to one "inus the value o% an e=uivalent call.
+. The value o% a put "inus the value o% a co"para.le call is e=ual to the value o% the stock
"inus the e$ercise price.
,. The value o% an )"erican put will e=ual or e$ceed the value o% a co"para.le ,uropean put.

21. The *lack-5choles option pricin' "odel can .e used %or?
). )"erican options .ut not ,uropean options.
*. ,uropean options .ut not )"erican options.
C. call options .ut not put options.
+. put options .ut not call options.
,. .oth <ero coupon .onds and coupon .onds.

25-3
Chapter 25 - Option Valuation
24. &hich o% the %ollowin' varia.les are included in the *lack-5choles call option pricin'
%or"ula(
/. put pre"iu"
//. A6d17
///. e$ercise price
/V. stock price
). /// and /V only
*. /0 //0 and /V only
C. //0 ///0 and /V only
+. /0 ///0 and /V only
,. /0 //0 ///0 and /V

25. &hich one o% the %ollowin' state"ents related to options is correct(
). )"erican stock options can .e e$ercised .ut not resold.
*. ) ,uropean call is either e=ual to or less valua.le than a co"para.le )"erican call.
C. ,uropean puts can .e resold .ut can never .e e$ercised.
+. ,uropean options can .e e$ercised on any dividend pay"ent date.
,. )"erican options are valued usin' the *lack-5choles option pricin' "odel.

23. The value o% a call option delta is .est de%ined as?
). .etween <ero and one.
*. less than <ero.
C. 'reater than <ero.
+. 'reater than or e=ual to <ero.
,. 'reater than one.

24. &hich one o% the %ollowin' is the correct %or"ula %or appro$i"atin' the chan'e in an
option2s value 'iven a s"all chan'e in the value o% the underlyin' stock(
). Chan'e in option value Chan'e in stock valueD+elta
*. Chan'e in option value Chan'e in stock valueD61 - +elta7
C. Chan'e in option value Chan'e in stock valueD61 E +elta7
+. Chan'e in option value Chan'e in stock value 61 - +elta7
,. Chan'e in option value Chan'e in stock value +elta

25-4
Chapter 25 - Option Valuation
28. )ssu"e the price o% the underlyin' stock decreases. !ow will the values o% the options
respond to this chan'e(
/. call value decreases
//. call value increases
///. put value decreases
/V. put value increases
). / and /// only
*. / and /V only
C. // and /// only
+. // and /V only
,. / only

2;. &hich o% the %ollowin' state"ents are correct(
/. /ncreasin' the ti"e to "aturity "ay not increase the value o% a ,uropean put.
//. Ve'a "easures the sensitivity o% an option2s value to the passa'e o% ti"e.
///. Call options tend to .e "ore sensitive to the passa'e o% ti"e than are put options.
/V. )n increase in ti"e decreases the value o% a call option.
). / and /// only
*. // and /V only
C. //0 ///0 and /V only
+. /0 ///0 and /V only
,. /0 //0 ///0 and /V

1. Theta "easures an option2s?
). intrinsic value.
*. volatility.
C. rate o% ti"e decay.
+. sensitivity to chan'es in the value o% the underlyin' asset.
,. sensitivity to risk-%ree rate chan'es.

11. 5ellin' an option is 'enerally "ore valua.le than e$ercisin' the option .ecause o% the
option2s?
). riskless value.
*. intrinsic value.
C. standard deviation.
+. e$ercise price.
,. ti"e pre"iu".

25-8
Chapter 25 - Option Valuation
12. &hich o% the %ollowin' state"ents are correct(
/. )s the standard deviation o% the returns on a stock increase0 the value o% a put option
increases.
//. The value o% a call option decreases as the ti"e to e$piration increases.
///. ) decrease in the risk-%ree rate increases the value o% a put option.
/V. /ncreasin' the strike price increases the value o% a put option.
). / and /// only
*. // and /V only
C. / and // only
+. /0 ///0 and /V only
,. /0 //0 and /// only

11. ) decrease in which o% the %ollowin' will increase the value o% a put option on a stock(
/. ti"e to e$piration
//. stock price
///. e$ercise price
/V. risk-%ree rate
). /// only
*. // and /V only
C. / and /// only
+. /0 //0 and /// only
,. //0 ///0 and /V only

14. &hich one o% the %ive %actors included in the *lack-5choles "odel cannot .e directly
o.served(
). risk-%ree rate
*. strike price
C. standard deviation
+. stock price
,. li%e o% the option

25-;
Chapter 25 - Option Valuation
15. &hich one o% the %ollowin' state"ents related to the i"plied standard deviation 6/5+7 is
correct(
). The /5+ is an esti"ate o% the historical standard deviation o% the underlyin' security.
*. /5+ is e=ual to 61 - +17.
C. The /5+ esti"ates the volatility o% an option2s price over the option2s li%espan.
+. The value o% /5+ is dependent upon .oth the risk-%ree rate and the ti"e to option
e$piration.
,. /5+ con%ir"s the o.serva.le volatility o% the return on the underlyin' security.

13. The i"plied standard deviation used in the *lack-5choles option pricin' "odel is?
). .ased on historical per%or"ance.
*. a prediction o% the volatility o% the return on the underlyin' asset over the li%e o% the option.
C. a "easure o% the ti"e decay o% an option.
+. an esti"ate o% the %uture value o% an option 'iven a strike price 6,7.
,. a "easure o% the historical intrinsic value o% an option.

14. The value o% an option is e=ual to the?
). intrinsic value "inus the ti"e pre"iu".
*. ti"e pre"iu" plus the intrinsic value.
C. i"plied standard deviation plus the intrinsic value.
+. su""ation o% the intrinsic value0 the ti"e pre"iu"0 and the i"plied standard deviation.
,. su""ation o% delta0 theta0 ve'a0 and rho.

18. For the e=uity o% a %ir" to .e considered a call option on the %ir"2s assets0 the %ir" "ust?
). .e in de%ault.
*. .e levera'ed.
C. pay dividends.
+. have a ne'ative cash %low %ro" operations.
,. have a ne'ative cash %low %ro" assets.

25-1
Chapter 25 - Option Valuation
1;. -ayin' o%% a %ir"2s de.t is co"para.le to GGGGG on the assets o% the %ir".
). purchasin' a put option
*. purchasin' a call option
C. e$ercisin' an in-the-"oney put option
+. e$ercisin' an in-the-"oney call option
,. sellin' a call option

4. The shareholders o% a %ir" will .ene%it the "ost %ro" a positive net present value pro#ect
when the delta o% the call option on the %ir"2s assets is?
). e=ual to one.
*. .etween <ero and one.
C. e=ual to <ero.
+. .etween <ero and "inus one.
,. e=ual to "inus one.

41. The value o% the risky de.t o% a %ir" is e=ual to the value o%?
). a call option plus the value o% a risk-%ree .ond.
*. a risk-%ree .ond plus a put option.
C. the e=uity o% the %ir" "inus a put.
+. the e=uity o% the %ir" plus a call option.
,. a risk-%ree .ond "inus a put option.

42. ) %ir" has assets o% $21.8 "illion and a 1-year0 <ero-coupon0 risky .onds with a total %ace
value o% $8.5 "illion. The .onds have a total current "arket value o% $8.1 "illion. !ow can
the shareholders o% this %ir" chan'e these risky .onds into risk-%ree .onds(
). purchase a call option with a 1-year li%e and a $8.1 "illion %ace value
*. purchase a call option with a 5-year li%e and a $8.5 "illion %ace value
C. purchase a put option with a 1-year li%e and a $21.8 "illion %ace value
+. purchase a put option with a 1-year li%e and a $8.1 "illion %ace value
,. purchase a put option with a 1-year li%e and an $8.5 "illion %ace value

25-11
Chapter 25 - Option Valuation
41. -ure %inancial "er'ers?
). are .ene%icial to stockholders.
*. are .ene%icial to .oth stockholders and .ondholders.
C. are detri"ental to stockholders.
+. add value to .oth the total assets and the total e=uity o% a %ir".
,. reduce .oth the total assets and the total e=uity o% a %ir".

44. ) purely %inancial "er'er?
). increases the risk that the "er'ed %ir" will de%ault on its de.t o.li'ations.
*. has no e%%ect on the risk level o% the %ir"2s de.t.
C. reduces the value o% the option to 'o .ankrupt.
+. has no e%%ect on the e=uity value o% a %ir".
,. reduces the risk level o% the %ir" and increases the value o% the %ir"2s e=uity.

45. &hich one o% the %ollowin' state"ents is correct(
). Her'ers .ene%it shareholders .ut not creditors.
*. -ositive A-V pro#ects will auto"atically .ene%it .oth creditors and shareholders.
C. 5hareholders "i'ht pre%er a ne'ative A-V pro#ect over a positive A-V pro#ect.
+. Creditors pre%er ne'ative A-V pro#ects while shareholders pre%er positive A-V pro#ects.
,. Her'ers rarely a%%ect .ondholders.

43. This "ornin'0 9rystal purchased shares o% >lo.al Harkets stock at a cost o% $1;.4 per
share. 5he si"ultaneously purchased puts on >lo.al Harkets stock at a cost o% $1.25 per share
and a strike price o% $4 per share. The put e$pires in one year. !ow "uch pro%it will she earn
per share on these transactions i% the stock is worth $18 a share one year %ro" now(
). -$2.35
*. -$1.25
C. -$.35
+. $.3
,. $1.25

25-12
Chapter 25 - Option Valuation
44. Today0 you purchased 1 shares o% 8a<y I stock at a "arket price o% $44 per share. Jou
also .ou'ht a one year0 $45 put option on 8a<y I stock at a cost o% $.15 per share. &hat is
the "a$i"u" total a"ount you can lose on these purchases(
). -$40415
*. -$40385
C. -$4015
+. -$215
,. -$

48. Today0 you are .uyin' a one-year call on -iper 5ons stock with a strike price o% $24.5 per
share and a one-year risk-%ree asset which pays 1.5 percent interest. The cost o% the call is
$1.4 per share and the a"ount invested in the risk-%ree asset is $23.54. !ow "uch total pro%it
will you earn on these purchases i% the stock has a "arket price o% $2; one year %ro" now(
). $.1
*. $.85
C. $1.1
+. $1.11
,. $1.14

4;. Today0 you are .uyin' a one-year call on one share o% &e.ster @nited stock with a strike
price o% $4 per share and a one-year risk-%ree asset that pays 4 percent interest. The cost o%
the call is $1.85 per share and the a"ount invested in the risk-%ree asset is $18.43. &hat is the
"ost you can lose on these purchases over the ne$t year(
). -$1.85
*. -$.11
C. $
+. $.42
,. $1.54

5. ).9. 5cott2s stock is sellin' %or $18 a share. ) 1-"onth call on this stock with a strike
price o% $15 is priced at $1.4. Cisk-%ree assets are currently returnin' .18 percent per "onth.
&hat is the price o% a 1-"onth put on this stock with a strike price o% $15(
). $.21
*. $.4;
C. $4.;;
+. $5.85
,. $3.2

25-11
Chapter 25 - Option Valuation
51. Cell Tower stock has a current "arket price o% $32 a share. The one-year call on Cell
Tower stock with a strike price o% $35 is priced at $4.13 while the one-year put with a strike
price o% $35 is priced at $4.3;. &hat is the risk-%ree rate o% return(
). 1.;5 percent
*. 4.21 percent
C. 4.34 percent
+. 5.18 percent
,. 5.54 percent

52. >rocery ,$press stock is sellin' %or $22 a share. ) 1-"onth0 $2 call on this stock is
priced at $2.35. Cisk-%ree assets are currently returnin' .2 percent per "onth. &hat is the
price o% a 1-"onth put on >rocery ,$press stock with a strike price o% $2(
). $.14
*. $.51
C. $.34
+. $1.1
,. $1.18

51. :KA0 /nc. stock has a current "arket price o% $43 a share. The one-year call on this stock
with a strike price o% $55 is priced at $.5 while the one-year put with a strike price o% $55 is
priced at $8.24. &hat is the risk-%ree rate o% return(
). 1.4; percent
*. 1.82 percent
C. 1.1 percent
+. 1.34 percent
,. 4.21 percent

54. Jou invest $40 today at 3.5 percent0 co"pounded continuously. !ow "uch will this
invest"ent .e worth 8 years %ro" now(
). $3032
*. $30428
C. $40111
+. $40422
,. $404;1

25-14
Chapter 25 - Option Valuation
55. Todd invested $805 in an account today at 4.5 percent co"pounded continuously. !ow
"uch will he have in his account i% he leaves his "oney invested %or 5 years(
). $12021
*. $120245
C. $120284
+. $120241
,. $120134

53. &esleyville Harkets stock is sellin' %or $13 a share. The ;-"onth $4 call on this stock is
sellin' %or $2.21 while the ;-"onth $4 put is priced at $5.11. &hat is the continuously
co"pounded risk-%ree rate o% return(
). 2.84 percent
*. 1.11 percent
C. 1.18 percent
+. 1.53 percent
,. 1.4; percent

54. The stock o% ,dwards !o"es0 /nc. has a current "arket value o% $21 a share. The 1-"onth
call with a strike price o% $2 is sellin' %or $1.8 while the 1-"onth put with a strike price o%
$2 is priced at $.54. &hat is the continuously co"pounded risk-%ree rate o% return(
). 4.41 percent
*. 4.5 percent
C. 4.38 percent
+. 5. percent
,. 5.21 percent

25-15
Chapter 25 - Option Valuation
58. &hat is the value o% d2 'iven the %ollowin' in%or"ation on a stock(

). .518
*. .525
C. .511
+. .515
,. .54

5;. >iven the %ollowin' in%or"ation0 what is the value o% d2 as it is used in the *lack-5choles
option pricin' "odel(

). -1.1143
*. -.8354
C. -.8241
+. -.4424
,. -.4218

25-13
Chapter 25 - Option Valuation
3. &hat is the value o% a 1-"onth call option with a strike price o% $25 'iven the *lack-
5choles option pricin' "odel and the %ollowin' in%or"ation(

). $1.18
*. $1.42
C. $1.38
+. $4.24
,. $4.51

31. &hat is the value o% a 3-"onth call with a strike price o% $25 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $
*. $.;1
C. $1.3
+. $1.85
,. $2.14

25-14
Chapter 25 - Option Valuation
32. &hat is the value o% a 3-"onth put with a strike price o% $24.5 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $3.41
*. $3.88
C. $4.24
+. $4.18
,. $4.32

31. &hat is the value o% a 1-"onth put with a strike price o% $45 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $.54
*. $.31
C. $.;1
+. $1.13
,. $1.54

34. ) stock is currently sellin' %or $55 a share. The risk-%ree rate is 4 percent and the standard
deviation is 18 percent. &hat is the value o% d1 o% a ;-"onth call option with a strike price o%
$54.5(
). -.153
*. -.1444
C. -.544
+. .42
,. .181

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Chapter 25 - Option Valuation
35. ) stock is currently sellin' %or $13 a share. The risk-%ree rate is 1.8 percent and the
standard deviation is 24 percent. &hat is the value o% d1 o% a ;-"onth call option with a strike
price o% $4(
). -.21842
*. -.2114;
C. -.2144
+. -.2;5
,. -.2153

33. The delta o% a call option on a %ir"2s assets is .434. This "eans that a $50 pro#ect
will increase the value o% e=uity .y?
). $21043.
*. $250113.
C. $18015.
+. $540324.
,. $35018;.

34. The delta o% a call option on a %ir"2s assets is .424. This "eans that a $1;50 pro#ect
will increase the value o% e=uity .y?
). $1410435.
*. $18021;.
C. $2110481.
+. $2340;;.
,. $2380223.

38. The current "arket value o% the assets o% 5"ethwell0 /nc. is $53 "illion0 with a standard
deviation o% 13 percent per year. The %ir" has <ero-coupon .onds outstandin' with a total %ace
value o% $4 "illion. These .onds "ature in 2 years. The risk-%ree rate is 4.5 percent per year
co"pounded continuously. &hat is the value o% d1(
). 1.34
*. 1.84
C. 1.;1
+. 2.
,. 2.3

25-1;
Chapter 25 - Option Valuation
3;. The current "arket value o% the assets o% Cristopherson 5upply is $43.5 "illion. The
"arket value o% the e=uity is $28.4 "illion. The risk-%ree rate is 4.45 percent and the
outstandin' de.t "atures in 4 years. &hat is the "arket value o% the %ir"2s de.t(
). $14.8 "illion
*. $1;.8 "illion
C. $2.21 "illion
+. $22.33 "illion
,. $21.1 "illion

4. The current "arket value o% the assets o% Aano Tek is $13 "illion. The "arket value o% the
e=uity is $4.5 "illion. The risk-%ree rate is 4.5 percent and the outstandin' de.t "atures in 5
years. &hat is the "arket value o% the %ir"2s de.t(
). $8.5 "illion
*. $;.;8 "illion
C. $12. "illion
+. $1;.42 "illion
,. $21.84 "illion


Essay Questions

41. ,$plain why the e=uity ownership o% a %ir" is e=uivalent to ownin' a call option on the
%ir"2s assets.




42. ,$plain how option pricin' theory can .e used to ar'ue that ac=uisitive %ir"s pursuin'
con'lo"erate "er'ers are not actin' in the shareholders2 .est interest.




25-2
Chapter 25 - Option Valuation
41. >ive an e$a"ple o% a protective put and e$plain how this strate'y reduces investor risk.




44. /denti%y the %ive varia.les that a%%ect the value o% an )"erican put option and indicate how
an increase in each o% the varia.les will a%%ect the value o% the put. )lso indicate the co""on
na"e0 i% any0 'iven to each varia.le.




45. ,$plain how an increase in T-.ill rates will a%%ect the value o% an )"erican call and an
)"erican put.




43. ,$plain why %inancial "er'ers tend to .ene%it .ondholders "ore than shareholders.





Multiple Choice Questions

25-21
Chapter 25 - Option Valuation
44. Jou need $120 in 3 years. !ow "uch will you need to deposit today i% you can earn 11
percent per year0 co"pounded continuously( )ssu"e this is the only deposit you "ake.
). $30.
*. $3048.5
C. $3014;.25
+. $3022.22
,. $30415.3;

48. ) stock is sellin' %or $3 per share. ) call option with an e$ercise price o% $34 sells %or
$1.11 and e$pires in 4 "onths. The risk-%ree rate o% interest is 2.8 percent per year0
co"pounded continuously. &hat is the price o% a put option with the sa"e e$ercise price and
e$piration date(
). $8.;;
*. $;.21
C. $;.44
+. $;.3;
,. $;.;4

4;. ) put option that e$pires in ei'ht "onths with an e$ercise price o% $54 sells %or $1.85. The
stock is currently priced at $5;0 and the risk-%ree rate is 1.1 percent per year0 co"pounded
continuously. &hat is the price o% a call option with the sa"e e$ercise price and e$piration
date(
). $3.34
*. $4.2
C. $4.14
+. $4.41
,. $4.8

25-22
Chapter 25 - Option Valuation

25-21
Chapter 25 - Option Valuation


8. &hat is the price o% a put option 'iven the %ollowin' in%or"ation(

). $13.54
*. $13.81
C. $14.44
+. $18.44
,. $1;.2

81. &hat is the delta o% a put option 'iven the %ollowin' in%or"ation(

). -.385
*. -.115
C. .115
+. .525
,. .385

25-24
Chapter 25 - Option Valuation
82. Jou own a lot in 9ey &est0 Florida0 that is currently unused. 5i"ilar lots have recently
sold %or $1.2 "illion. Over the past %ive years0 the price o% land in the area has increased 1
percent per year0 with an annual standard deviation o% 21 percent. ) .uyer has recently
approached you and wants an option to .uy the land in the ne$t ; "onths %or $10110. The
risk-%ree rate o% interest is 4 percent per year0 co"pounded continuously. !ow "uch should
you char'e %or the option( (Round your answer to the nearest $1,000.)
). $520
*. $580
C. $310
+. $420
,. $440

81. ) call option with an e$ercise price o% $11 and 3 "onths to e$piration has a price o%
$1.44. The stock is currently priced at $14.;;0 and the risk-%ree rate is 1 percent per year0
co"pounded continuously. &hat is the price o% a put option with the sa"e e$ercise price and
e$piration date(
). $11.8;
*. $14.54
C. $15.24
+. $15.3;
,. $13.12

84. ) call option "atures in nine "onths. The underlyin' stock price is $;50 and the stock2s
return has a standard deviation o% 1; percent per year. The risk-%ree rate is 1 percent per year0
co"pounded continuously. The e$ercise price is $. &hat is the price o% the call option(
). $15.;4
*. $52.14
C. $53.14
+. $;2.21
,. $;5.

25-25
Chapter 25 - Option Valuation
85. ) stock is currently priced at $45. ) call option with an e$piration o% one year has an
e$ercise price o% $3. The risk-%ree rate is 14 percent per year0 co"pounded continuously0 and
the standard deviation o% the stock2s return is in%initely lar'e. &hat is the price o% the call
option(
). $1;.44
*. $42.8
C. $45.
+. $52.31
,. $3.

83. 5un.urn 5unscreen has a <ero coupon .ond issue outstandin' with a $10 %ace value
that "atures in one year. The current "arket value o% the %ir"2s assets is $103. The
standard deviation o% the return on the %ir"2s assets is 4 percent per year0 and the annual risk-
%ree rate is 4 percent per year0 co"pounded continuously. &hat is the "arket value o% the
%ir"2s de.t .ased on the *lack-5choles "odel( (Round your answer to the nearest $100.)
). $30415.1
*. $30;
C. $801
+. $808
,. $;02

84. Frost.ite Ther"al &ear has a <ero coupon .ond issue outstandin' with a %ace value o%
$20 that "atures in one year. The current "arket value o% the %ir"2s assets is $210. The
standard deviation o% the return on the %ir"2s assets is 52 percent per year0 and the annual risk-
%ree rate is 3 percent per year0 co"pounded continuously. &hat is the "arket value o% the
%ir"2s e=uity .ased on the *lack-5choles "odel( (Round your answer to the nearest $100.)
). $304
*. $304
C. $30;
+. $40
,. $402

25-23
Chapter 25 - Option Valuation
Chapter 25 Option Valuation )nswer 9ey


Multiple Choice Questions

1. Travis owns a stock that is currently valued at $45.8 a share. !e is concerned that the
stock price "ay decline so he #ust purchased a put option on the stock with an e$ercise price
o% $45. &hich one o% the %ollowin' ter"s applies to the strate'y Travis is usin'(
). put-call parity
*. covered call
C. protective put
+. straddle
,. stran'le
Ce%er to section 25.1

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25-24
Chapter 25 - Option Valuation
2. -ut-call parity is de%ined as the relationship .etween which o% the %ollowin' varia.les(
/. risk-%ree asset
//. underlyin' stock price
///. call option
/V. put option
). / and // only
*. // and /// only
C. //0 ///0 and /V only
+. /0 //0 and /// only
E. /0 //0 ///0 and /V
Ce%er to section 25.1

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1. )ssu"e the price o% &estward Co. stock increases .y one percent. &hich one o% the
%ollowin' "easures the e%%ect that this chan'e in the stock price will have on the value o% the
&estward Co. options(
). theta
*. ve'a
C. rho
D. delta
,. 'a""a
Ce%er to section 25.1

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25-28
Chapter 25 - Option Valuation
4. &hich one o% the %ollowin' de%ines the relationship .etween the value o% an option and the
option2s ti"e to e$piration(
A. theta.
*. ve'a.
C. rho.
+. delta.
,. 'a""a.
Ce%er to section 25.1

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5. )ssu"e the standard deviation o% the returns on )*C stock increases. The e%%ect o% this
chan'e on the value o% the call options on )*C stock is "easured .y which one o% the
%ollowin'(
). theta.
B. ve'a.
C. rho.
+. delta.
,. 'a""a.
Ce%er to section 25.1

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25-2;
Chapter 25 - Option Valuation
3. The sensitivity o% an option2s value to a chan'e in the risk-%ree rate is "easured .y which
one o% the %ollowin'(
). theta.
*. ve'a.
C. rho.
+. delta.
,. 'a""a.
Ce%er to section 25.1

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4. The i"plied volatility o% the returns on the underlyin' asset that is co"puted usin' the
*lack-5choles option pricin' "odel is re%erred to as which one o% the %ollowin'(
). residual error
*. i"plied "ean return
C. derived case volatility 6+CV7
+. %orecast rho
E. i"plied standard deviation 6/5+7
Ce%er to section 25.1

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25-1
Chapter 25 - Option Valuation
8. )"y #ust purchased a ri'ht to .uy 1 shares o% 898 stock %or $15 a share on :une 20
2;. &hich one o% the %ollowin' did )"y purchase(
). )"erican delta
*. )"erican call
C. )"erican put
+. ,uropean put
E. ,uropean call
Ce%er to section 25.1

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;. &hich one o% the %ollowin' provides the option o% sellin' a stock anyti"e durin' the option
period at a speci%ied price even i% the "arket price o% the stock declines to <ero(
). )"erican call
*. ,uropean call
C. )"erican put
+. ,uropean put
,. either an )"erican or a ,uropean put
Ce%er to section 25.1

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25-11
Chapter 25 - Option Valuation
1. &hich one o% the %ollowin' .est de%ines the pri"ary purpose o% a protective put(
). ensure a "a$i"u" purchase price in the %uture
*. o%%set an e=uivalent call option
C. li"it the downside risk o% asset ownership
+. lock in a risk-%ree rate o% return on a %inancial asset
,. increase the upside potential return on an invest"ent
Ce%er to section 25.1

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11. &hich one o% the %ollowin' acts like an insurance policy i% the price o% a stock you own
suddenly decreases in value(
). sale o% a ,uropean call option
*. sale o% an )"erican put option
C. purchase o% a protective put
+. purchase o% a protective call
,. either the sale or purchase o% a put
Ce%er to section 25.1

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25-12
Chapter 25 - Option Valuation
12. &hich one o% the %ollowin' can .e used to replicate a protective put strate'y(
). riskless invest"ent and stock purchase
*. stock purchase and call option
C. call option and riskless invest"ent
+. riskless invest"ent
,. call option0 stock purchase0 and riskless invest"ent
Ce%er to section 25.1

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11. >iven the 617 e$ercise price ,0 627 ti"e to "aturity T0 and 617 ,uropean put-call parity0 the
present value o% , plus the value o% the call option is e=ual to the?
). current "arket value o% the stock.
*. present value o% the stock "inus the value o% the put.
C. value o% the put "inus the "arket value o% the stock.
+. value o% a risk-%ree asset.
E. stock value plus the put value.
Ce%er to section 25.1

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25-11
Chapter 25 - Option Valuation
14. &hich one o% the %ollowin' will provide you with the sa"e value that you would have i%
you #ust purchased *)T stock(
). sell a put option on *)T stock and invest at the risk-%ree rate o% return
*. .uy .oth a call option and a put option on *)T stock and also lend out %unds at the risk-
%ree rate
C. sell a put and .uy a call on *)T stock as well as invest at the risk-%ree rate o% return
+. lend out %unds at the risk-%ree rate o% return and sell a put option on *)T stock
,. .orrow %unds at the risk-%ree rate o% return and invest the proceeds in e=uivalent a"ounts o%
put and call options on *)T stock
Ce%er to section 25.1

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15. @nder ,uropean put-call parity0 the present value o% the strike price is e=uivalent to?
). the current value o% the stock "inus the call pre"iu".
*. the "arket value o% the stock plus the put pre"iu".
C. the present value o% a 'overn"ent coupon .ond with a %ace value e=ual to the strike price.
D. a @.5. Treasury .ill with a %ace value e=ual to the strike price.
,. a risk-%ree security with a %ace value e=ual to the strike price and a coupon rate e=ual to the
risk-%ree rate o% return.
Ce%er to section 25.1

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25-14
Chapter 25 - Option Valuation
13. Traci wants to have $130 si$ years %ro" now and wants to deposit #ust one lu"p su"
a"ount today. The annual percenta'e rate applica.le to her invest"ent is 3.8 percent. &hich
one o% the %ollowin' "ethods o% co"poundin' interest will allow her to deposit the least
a"ount possi.le today(
). annual
*. daily
C. =uarterly
+. "onthly
E. continuous
Ce%er to section 25.1

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14. The seller o% a ,uropean call option has the?
). ri'ht0 .ut not the o.li'ation0 to .uy a stock at a speci%ied price on a speci%ied date.
*. ri'ht to .uy a stock at a speci%ied price durin' a speci%ied period o% ti"e.
C. o.li'ation to sell a stock on a speci%ied date .ut only at the speci%ied price.
+. o.li'ation to .uy a stock so"e ti"e durin' a speci%ied period at the speci%ied price.
,. o.li'ation to .uy a stock at the lower o% the e$ercise price or the "arket price on the
e$piration date.
Ce%er to section 25.2

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25-15
Chapter 25 - Option Valuation
18. /n the *lack-5choles option pricin' %or"ula0 A6d17 is the pro.a.ility that a standardi<ed0
nor"ally distri.uted rando" varia.le is?
). less than or e=ual to A6d27.
*. less than one.
C. e=ual to one.
+. e=ual to d1.
E. less than or e=ual to d1.
Ce%er to section 25.2

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1;. /n the *lack-5choles "odel0 the sy".ol BB is used to represent the standard deviation o%
the?
). option pre"iu" on a call with a speci%ied e$ercise price.
B. rate o% return on the underlyin' asset.
C. volatility o% the risk-%ree rate o% return.
+. rate o% return on a risk-%ree asset.
,. option pre"iu" on a put with a speci%ied e$ercise price.
Ce%er to section 25.2

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25-13
Chapter 25 - Option Valuation
2. &hich o% the %ollowin' a%%ect the value o% a call option(
/. strike price
//. ti"e to "aturity
///. standard deviation o% the returns on a risk-%ree asset
/V. risk-%ree rate
). / and /// only
*. // and /V only
C. /0 //0 and /V only
+. //0 ///0 and /V only
,. /0 //0 ///0 and /V
Ce%er to section 25.2

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21. To co"pute the value o% a put usin' the *lack-5choles option pricin' "odel0 you?
). %irst have to apply the put-call parity relationship.
B. %irst have to co"pute the value o% the put as i% it is a call.
C. co"pute the value o% an e=uivalent call and then su.tract that value %ro" one.
+. co"pute the value o% an e=uivalent call and then su.tract that value %ro" the "arket price
o% the stock.
,. co"pute the value o% an e=uivalent call and then "ultiply that value .y e
-CT
.
Ce%er to section 25.2

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25-14
Chapter 25 - Option Valuation
22. &hich one o% the %ollowin' state"ents is correct(
). The price o% an )"erican put is e=ual to the stock price "inus the e$ercise price.
*. The value o% a ,uropean call is 'reater than the value o% a co"para.le )"erican call.
C. The value o% a put is e=ual to one "inus the value o% an e=uivalent call.
+. The value o% a put "inus the value o% a co"para.le call is e=ual to the value o% the stock
"inus the e$ercise price.
E. The value o% an )"erican put will e=ual or e$ceed the value o% a co"para.le ,uropean
put.
Ce%er to section 25.2

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21. The *lack-5choles option pricin' "odel can .e used %or?
). )"erican options .ut not ,uropean options.
B. ,uropean options .ut not )"erican options.
C. call options .ut not put options.
+. put options .ut not call options.
,. .oth <ero coupon .onds and coupon .onds.
Ce%er to section 25.2

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25-18
Chapter 25 - Option Valuation
24. &hich o% the %ollowin' varia.les are included in the *lack-5choles call option pricin'
%or"ula(
/. put pre"iu"
//. A6d17
///. e$ercise price
/V. stock price
). /// and /V only
*. /0 //0 and /V only
C. //0 ///0 and /V only
+. /0 ///0 and /V only
,. /0 //0 ///0 and /V
Ce%er to section 25.2

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25. &hich one o% the %ollowin' state"ents related to options is correct(
). )"erican stock options can .e e$ercised .ut not resold.
B. ) ,uropean call is either e=ual to or less valua.le than a co"para.le )"erican call.
C. ,uropean puts can .e resold .ut can never .e e$ercised.
+. ,uropean options can .e e$ercised on any dividend pay"ent date.
,. )"erican options are valued usin' the *lack-5choles option pricin' "odel.
Ce%er to section 25.2

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25-1;
Chapter 25 - Option Valuation
23. The value o% a call option delta is .est de%ined as?
A. .etween <ero and one.
*. less than <ero.
C. 'reater than <ero.
+. 'reater than or e=ual to <ero.
,. 'reater than one.
Ce%er to section 25.1

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24. &hich one o% the %ollowin' is the correct %or"ula %or appro$i"atin' the chan'e in an
option2s value 'iven a s"all chan'e in the value o% the underlyin' stock(
). Chan'e in option value Chan'e in stock valueD+elta
*. Chan'e in option value Chan'e in stock valueD61 - +elta7
C. Chan'e in option value Chan'e in stock valueD61 E +elta7
+. Chan'e in option value Chan'e in stock value 61 - +elta7
E. Chan'e in option value Chan'e in stock value +elta
Ce%er to section 25.1

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25-4
Chapter 25 - Option Valuation
28. )ssu"e the price o% the underlyin' stock decreases. !ow will the values o% the options
respond to this chan'e(
/. call value decreases
//. call value increases
///. put value decreases
/V. put value increases
). / and /// only
B. / and /V only
C. // and /// only
+. // and /V only
,. / only
Ce%er to section 25.1

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on delta

2;. &hich o% the %ollowin' state"ents are correct(
/. /ncreasin' the ti"e to "aturity "ay not increase the value o% a ,uropean put.
//. Ve'a "easures the sensitivity o% an option2s value to the passa'e o% ti"e.
///. Call options tend to .e "ore sensitive to the passa'e o% ti"e than are put options.
/V. )n increase in ti"e decreases the value o% a call option.
A. / and /// only
*. // and /V only
C. //0 ///0 and /V only
+. /0 ///0 and /V only
,. /0 //0 ///0 and /V
Ce%er to section 25.1

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on theta

25-41
Chapter 25 - Option Valuation
1. Theta "easures an option2s?
). intrinsic value.
*. volatility.
C. rate o% ti"e decay.
+. sensitivity to chan'es in the value o% the underlyin' asset.
,. sensitivity to risk-%ree rate chan'es.
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on theta

11. 5ellin' an option is 'enerally "ore valua.le than e$ercisin' the option .ecause o% the
option2s?
). riskless value.
*. intrinsic value.
C. standard deviation.
+. e$ercise price.
E. ti"e pre"iu".
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on *alue

25-42
Chapter 25 - Option Valuation
12. &hich o% the %ollowin' state"ents are correct(
/. )s the standard deviation o% the returns on a stock increase0 the value o% a put option
increases.
//. The value o% a call option decreases as the ti"e to e$piration increases.
///. ) decrease in the risk-%ree rate increases the value o% a put option.
/V. /ncreasin' the strike price increases the value o% a put option.
). / and /// only
*. // and /V only
C. / and // only
D. /0 ///0 and /V only
,. /0 //0 and /// only
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on #n/uts

11. ) decrease in which o% the %ollowin' will increase the value o% a put option on a stock(
/. ti"e to e$piration
//. stock price
///. e$ercise price
/V. risk-%ree rate
). /// only
B. // and /V only
C. / and /// only
+. /0 //0 and /// only
,. //0 ///0 and /V only
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on #n/uts

25-41
Chapter 25 - Option Valuation
14. &hich one o% the %ive %actors included in the *lack-5choles "odel cannot .e directly
o.served(
). risk-%ree rate
*. strike price
C. standard deviation
+. stock price
,. li%e o% the option
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Bla%4-S%holes

15. &hich one o% the %ollowin' state"ents related to the i"plied standard deviation 6/5+7 is
correct(
). The /5+ is an esti"ate o% the historical standard deviation o% the underlyin' security.
*. /5+ is e=ual to 61 - +17.
C. The /5+ esti"ates the volatility o% an option2s price over the option2s li%espan.
D. The value o% /5+ is dependent upon .oth the risk-%ree rate and the ti"e to option
e$piration.
,. /5+ con%ir"s the o.serva.le volatility o% the return on the underlyin' security.
Ce%er to section 25.1

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 2m/l#ed standard de*#at#on

25-44
Chapter 25 - Option Valuation
13. The i"plied standard deviation used in the *lack-5choles option pricin' "odel is?
). .ased on historical per%or"ance.
B. a prediction o% the volatility o% the return on the underlyin' asset over the li%e o% the option.
C. a "easure o% the ti"e decay o% an option.
+. an esti"ate o% the %uture value o% an option 'iven a strike price 6,7.
,. a "easure o% the historical intrinsic value o% an option.
Ce%er to section 25.1

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 2m/l#ed standard de*#at#on

14. The value o% an option is e=ual to the?
). intrinsic value "inus the ti"e pre"iu".
B. ti"e pre"iu" plus the intrinsic value.
C. i"plied standard deviation plus the intrinsic value.
+. su""ation o% the intrinsic value0 the ti"e pre"iu"0 and the i"plied standard deviation.
,. su""ation o% delta0 theta0 ve'a0 and rho.
Ce%er to section 25.1

AACSB: N/A
Bloom's: '/t#on *alue
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: '/t#on *alue

25-45
Chapter 25 - Option Valuation
18. For the e=uity o% a %ir" to .e considered a call option on the %ir"2s assets0 the %ir" "ust?
). .e in de%ault.
B. .e levera'ed.
C. pay dividends.
+. have a ne'ative cash %low %ro" operations.
,. have a ne'ative cash %low %ro" assets.
Ce%er to section 25.4

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: 36u#ty *alue o$ $#rm

1;. -ayin' o%% a %ir"2s de.t is co"para.le to GGGGG on the assets o% the %ir".
). purchasin' a put option
*. purchasin' a call option
C. e$ercisin' an in-the-"oney put option
D. e$ercisin' an in-the-"oney call option
,. sellin' a call option
Ce%er to section 25.4

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: 36u#ty *alue o$ $#rm

25-43
Chapter 25 - Option Valuation
4. The shareholders o% a %ir" will .ene%it the "ost %ro" a positive net present value pro#ect
when the delta o% the call option on the %ir"2s assets is?
A. e=ual to one.
*. .etween <ero and one.
C. e=ual to <ero.
+. .etween <ero and "inus one.
,. e=ual to "inus one.
Ce%er to section 25.4

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: 36u#ty *alue o$ $#rm

41. The value o% the risky de.t o% a %ir" is e=ual to the value o%?
). a call option plus the value o% a risk-%ree .ond.
*. a risk-%ree .ond plus a put option.
C. the e=uity o% the %ir" "inus a put.
+. the e=uity o% the %ir" plus a call option.
E. a risk-%ree .ond "inus a put option.
Ce%er to section 25.4

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: 7alue o$ $#rm de(t

25-44
Chapter 25 - Option Valuation
42. ) %ir" has assets o% $21.8 "illion and a 1-year0 <ero-coupon0 risky .onds with a total %ace
value o% $8.5 "illion. The .onds have a total current "arket value o% $8.1 "illion. !ow can
the shareholders o% this %ir" chan'e these risky .onds into risk-%ree .onds(
). purchase a call option with a 1-year li%e and a $8.1 "illion %ace value
*. purchase a call option with a 5-year li%e and a $8.5 "illion %ace value
C. purchase a put option with a 1-year li%e and a $21.8 "illion %ace value
+. purchase a put option with a 1-year li%e and a $8.1 "illion %ace value
E. purchase a put option with a 1-year li%e and an $8.5 "illion %ace value
Ce%er to section 25.4

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: Bond /rote%t#*e /ut

41. -ure %inancial "er'ers?
). are .ene%icial to stockholders.
*. are .ene%icial to .oth stockholders and .ondholders.
C. are detri"ental to stockholders.
+. add value to .oth the total assets and the total e=uity o% a %ir".
,. reduce .oth the total assets and the total e=uity o% a %ir".
Ce%er to section 25.5

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-,
Se%t#on: +,.,
.o/#%: '/t#ons and mer!ers

25-48
Chapter 25 - Option Valuation
44. ) purely %inancial "er'er?
). increases the risk that the "er'ed %ir" will de%ault on its de.t o.li'ations.
*. has no e%%ect on the risk level o% the %ir"2s de.t.
C. reduces the value o% the option to 'o .ankrupt.
+. has no e%%ect on the e=uity value o% a %ir".
,. reduces the risk level o% the %ir" and increases the value o% the %ir"2s e=uity.
Ce%er to section 25.5

AACSB: N/A
Bloom's: nowled!e
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-,
Se%t#on: +,.,
.o/#%: '/t#ons and mer!ers

45. &hich one o% the %ollowin' state"ents is correct(
). Her'ers .ene%it shareholders .ut not creditors.
*. -ositive A-V pro#ects will auto"atically .ene%it .oth creditors and shareholders.
C. 5hareholders "i'ht pre%er a ne'ative A-V pro#ect over a positive A-V pro#ect.
+. Creditors pre%er ne'ative A-V pro#ects while shareholders pre%er positive A-V pro#ects.
,. Her'ers rarely a%%ect .ondholders.
Ce%er to section 25.5

AACSB: N/A
Bloom's: Com/rehens#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-,
Se%t#on: +,.,
.o/#%: '/t#ons and %a/#tal (ud!et#n!

25-4;
Chapter 25 - Option Valuation
43. This "ornin'0 9rystal purchased shares o% >lo.al Harkets stock at a cost o% $1;.4 per
share. 5he si"ultaneously purchased puts on >lo.al Harkets stock at a cost o% $1.25 per share
and a strike price o% $4 per share. The put e$pires in one year. !ow "uch pro%it will she earn
per share on these transactions i% the stock is worth $18 a share one year %ro" now(
). -$2.35
*. -$1.25
C. -$.35
+. $.3
,. $1.25
-ro%it L $4 - $1;.4 - $1.25 L -$.35

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0rote%t#*e /ut strate!y

44. Today0 you purchased 1 shares o% 8a<y I stock at a "arket price o% $44 per share. Jou
also .ou'ht a one year0 $45 put option on 8a<y I stock at a cost o% $.15 per share. &hat is
the "a$i"u" total a"ount you can lose on these purchases(
). -$40415
*. -$40385
C. -$4015
D. -$215
,. -$
Ha$i"u" loss L 1 6$45 - $44 - $.157 L -$215

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0rote%t#*e /ut strate!y

25-5
Chapter 25 - Option Valuation
48. Today0 you are .uyin' a one-year call on -iper 5ons stock with a strike price o% $24.5 per
share and a one-year risk-%ree asset which pays 1.5 percent interest. The cost o% the call is
$1.4 per share and the a"ount invested in the risk-%ree asset is $23.54. !ow "uch total pro%it
will you earn on these purchases i% the stock has a "arket price o% $2; one year %ro" now(
). $.1
*. $.85
C. $1.1
+. $1.11
,. $1.14
-ro%it L 6$23.54 1.157 - $23.54 E 6$2; - $24.57 - $1.4 L $1.1

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: R#s4-$ree asset /lus %all

4;. Today0 you are .uyin' a one-year call on one share o% &e.ster @nited stock with a strike
price o% $4 per share and a one-year risk-%ree asset that pays 4 percent interest. The cost o%
the call is $1.85 per share and the a"ount invested in the risk-%ree asset is $18.43. &hat is the
"ost you can lose on these purchases over the ne$t year(
). -$1.85
B. -$.11
C. $
+. $.42
,. $1.54
Ha$i"u" loss L 6$18.43 1.47 - $18.43 E $ - $1.85 L -$.11

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: R#s4-$ree asset /lus %all

25-51
Chapter 25 - Option Valuation
5. ).9. 5cott2s stock is sellin' %or $18 a share. ) 1-"onth call on this stock with a strike
price o% $15 is priced at $1.4. Cisk-%ree assets are currently returnin' .18 percent per "onth.
&hat is the price o% a 1-"onth put on this stock with a strike price o% $15(
A. $.21
*. $.4;
C. $4.;;
+. $5.85
,. $3.2
- L 6$15D1.18
1
7 E $1.4 - $18 L $.21

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

51. Cell Tower stock has a current "arket price o% $32 a share. The one-year call on Cell
Tower stock with a strike price o% $35 is priced at $4.13 while the one-year put with a strike
price o% $35 is priced at $4.3;. &hat is the risk-%ree rate o% return(
A. 1.;5 percent
*. 4.21 percent
C. 4.34 percent
+. 5.18 percent
,. 5.54 percent
$35D61 E r7 L -$4.13 E $32 E $4.3;M r L 1.;5 percent

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

25-52
Chapter 25 - Option Valuation
52. >rocery ,$press stock is sellin' %or $22 a share. ) 1-"onth0 $2 call on this stock is
priced at $2.35. Cisk-%ree assets are currently returnin' .2 percent per "onth. &hat is the
price o% a 1-"onth put on >rocery ,$press stock with a strike price o% $2(
). $.14
B. $.51
C. $.34
+. $1.1
,. $1.18
- L 6$2D1.2
1
7 E $2.35 - $22 L $.51

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

51. :KA0 /nc. stock has a current "arket price o% $43 a share. The one-year call on this stock
with a strike price o% $55 is priced at $.5 while the one-year put with a strike price o% $55 is
priced at $8.24. &hat is the risk-%ree rate o% return(
A. 1.4; percent
*. 1.82 percent
C. 1.1 percent
+. 1.34 percent
,. 4.21 percent
$55D61 E r7 L -$.5 E $43 E $8.24M r L 1.4; percent

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

25-51
Chapter 25 - Option Valuation
54. Jou invest $40 today at 3.5 percent0 co"pounded continuously. !ow "uch will this
invest"ent .e worth 8 years %ro" now(
). $3032
B. $30428
C. $40111
+. $40422
,. $404;1
FV L $40 2.41828
.35 8
L $30428

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Cont#nuous %om/ound#n!

55. Todd invested $805 in an account today at 4.5 percent co"pounded continuously. !ow
"uch will he have in his account i% he leaves his "oney invested %or 5 years(
). $12021
*. $120245
C. $120284
+. $120241
E. $120134
FV L $805 2.41828
.45 5
L $120134

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Cont#nuous %om/ound#n!

25-54
Chapter 25 - Option Valuation
53. &esleyville Harkets stock is sellin' %or $13 a share. The ;-"onth $4 call on this stock is
sellin' %or $2.21 while the ;-"onth $4 put is priced at $5.11. &hat is the continuously
co"pounded risk-%ree rate o% return(
). 2.84 percent
*. 1.11 percent
C. 1.18 percent
+. 1.53 percent
E. 1.4; percent
6$4 e
-C .45
7 L -$2.21 E $13 E $5.11
$4 e
-.45C
L $18.88
ln6e
-.45C
7 L ln.;42
-.45C L -.284
C L 1.4; percent

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Cont#nuously %om/ounded rate

54. The stock o% ,dwards !o"es0 /nc. has a current "arket value o% $21 a share. The 1-"onth
call with a strike price o% $2 is sellin' %or $1.8 while the 1-"onth put with a strike price o%
$2 is priced at $.54. &hat is the continuously co"pounded risk-%ree rate o% return(
). 4.41 percent
*. 4.5 percent
C. 4.38 percent
+. 5. percent
E. 5.21 percent
6$2 e
-C .25
7 L -$1.8 E $21 E $.54
$2 e
-.25C
L $1;.44
ln6e
-.25C
7 L ln .;84
-.25C L -.1185
C L 5.21 percent

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Cont#nuously %om/ounded rate

25-55
Chapter 25 - Option Valuation
58. &hat is the value o% d2 'iven the %ollowin' in%or"ation on a stock(

). .518
*. .525
C. .511
+. .515
,. .54
d2 L .31155 - N.34 6.45
1D2
7O L .511

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-53
Chapter 25 - Option Valuation
5;. >iven the %ollowin' in%or"ation0 what is the value o% d2 as it is used in the *lack-5choles
option pricin' "odel(

A. -1.1143
*. -.8354
C. -.8241
+. -.4424
,. -.4218
d2 L -.3582; - N.55 6.45
1D2
7O L -1.1143

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-54
Chapter 25 - Option Valuation
3. &hat is the value o% a 1-"onth call option with a strike price o% $25 'iven the *lack-
5choles option pricin' "odel and the %ollowin' in%or"ation(

). $1.18
*. $1.42
C. $1.38
+. $4.24
E. $4.51
C L 6$28.15 .443;;7 - 6$25 2.41828
-.4 .25
.333427 L $4.51

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-58
Chapter 25 - Option Valuation
31. &hat is the value o% a 3-"onth call with a strike price o% $25 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $
B. $.;1
C. $1.3
+. $1.85
,. $2.14
C L 6$14.2 .23137 - 6$25 2.41828
-.145 .5
.144537 L $.;1

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-5;
Chapter 25 - Option Valuation
32. &hat is the value o% a 3-"onth put with a strike price o% $24.5 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $3.41
*. $3.88
C. $4.24
D. $4.18
,. $4.32
- L 6$24.5 2.41828
-.15 .5
7 E $1.4313 - $21.1 L $4.18

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

31. &hat is the value o% a 1-"onth put with a strike price o% $45 'iven the *lack-5choles
option pricin' "odel and the %ollowin' in%or"ation(

). $.54
*. $.31
C. $.;1
+. $1.13
,. $1.54
- L 6$45 2.41828
-.45 .25
7 E $;.11 - $52.; L $.;1

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-3
Chapter 25 - Option Valuation
34. ) stock is currently sellin' %or $55 a share. The risk-%ree rate is 4 percent and the standard
deviation is 18 percent. &hat is the value o% d1 o% a ;-"onth call option with a strike price o%
$54.5(
). -.153
B. -.1444
C. -.544
+. .42
,. .181

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.o/#%: Call o/t#on delta

35. ) stock is currently sellin' %or $13 a share. The risk-%ree rate is 1.8 percent and the
standard deviation is 24 percent. &hat is the value o% d1 o% a ;-"onth call option with a strike
price o% $4(
). -.21842
B. -.2114;
C. -.2144
+. -.2;5
,. -.2153

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.o/#%: Call o/t#on delta

25-31
Chapter 25 - Option Valuation
33. The delta o% a call option on a %ir"2s assets is .434. This "eans that a $50 pro#ect
will increase the value o% e=uity .y?
). $21043.
*. $250113.
C. $18015.
+. $540324.
,. $35018;.
/ncrease in e=uity value L $50 .434 L $18015

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Bloom's: A//l#%at#on
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&earn#n! '()e%t#*e: +,-5
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.o/#%: 8ar4et *alue o$ e6u#ty

34. The delta o% a call option on a %ir"2s assets is .424. This "eans that a $1;50 pro#ect
will increase the value o% e=uity .y?
A. $1410435.
*. $18021;.
C. $2110481.
+. $2340;;.
,. $2380223.
/ncrease in e=uity value L $1;50 .424 L $1410435

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
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25-32
Chapter 25 - Option Valuation
38. The current "arket value o% the assets o% 5"ethwell0 /nc. is $53 "illion0 with a standard
deviation o% 13 percent per year. The %ir" has <ero-coupon .onds outstandin' with a total %ace
value o% $4 "illion. These .onds "ature in 2 years. The risk-%ree rate is 4.5 percent per year
co"pounded continuously. &hat is the value o% d1(
). 1.34
*. 1.84
C. 1.;1
D. 2.
,. 2.3

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3;. The current "arket value o% the assets o% Cristopherson 5upply is $43.5 "illion. The
"arket value o% the e=uity is $28.4 "illion. The risk-%ree rate is 4.45 percent and the
outstandin' de.t "atures in 4 years. &hat is the "arket value o% the %ir"2s de.t(
A. $14.8 "illion
*. $1;.8 "illion
C. $2.21 "illion
+. $22.33 "illion
,. $21.1 "illion
Harket value o% de.t L $43.5" - $28.4" L $14.8"

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
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25-31
Chapter 25 - Option Valuation
4. The current "arket value o% the assets o% Aano Tek is $13 "illion. The "arket value o% the
e=uity is $4.5 "illion. The risk-%ree rate is 4.5 percent and the outstandin' de.t "atures in 5
years. &hat is the "arket value o% the %ir"2s de.t(
A. $8.5 "illion
*. $;.;8 "illion
C. $12. "illion
+. $1;.42 "illion
,. $21.84 "illion
Harket value o% de.t L $13" - $4.5" L $8.5"

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
&earn#n! '()e%t#*e: +,-5
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.o/#%: 8ar4et *alue o$ de(t


Essay Questions

41. ,$plain why the e=uity ownership o% a %ir" is e=uivalent to ownin' a call option on the
%ir"2s assets.
,=uity is e=ual to asset "inus lia.ilities. This relationship re%lects the residual ownership
%eature o% e=uity. *ecause o% the li"ited lia.ility %eature o% e=uity ownership in a corporation0
the e=uity "ust always .e non-ne'ative in value0 even i% the de.ts o% the %ir" e$ceed the
value o% the assets and the %ir" is in technical 6i% not outri'ht7 .ankruptcy. Thus0 the e=uity L
"a$6) - +070 is e=ual to a call option on the assets o% the %ir" with a strike price e=ual to the
%ace value o% the %ir"2s de.t.
Feed.ack? Ce%er to section 25.4

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25-34
Chapter 25 - Option Valuation
42. ,$plain how option pricin' theory can .e used to ar'ue that ac=uisitive %ir"s pursuin'
con'lo"erate "er'ers are not actin' in the shareholders2 .est interest.
*ecause e=uity can .e viewed as a call option on the assets o% the %ir"0 the *lack-5choles
option pricin' "odel tells us that e=uity value will increase i% the standard deviation o% the
%ir"2s assets increases. To the e$tent that con'lo"erate "er'ers create a "ore diversi%ied
.usiness "odel %or the ac=uirin' %ir"0 the standard deviation o% the assets will actually
decrease0 which is counter to the shareholders2 interest in "a$i"i<in' the value o% the %ir".
The shareholders would pre%er that "ana'ers seek out "a$i"u" risk in their .usiness
activities.
Feed.ack? Ce%er to section 25.5

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Bloom's: Analys#s
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41. >ive an e$a"ple o% a protective put and e$plain how this strate'y reduces investor risk.
5tudents should 'ive an e$a"ple that includes the purchase o% a stock and also a put. The
strike price should .e relatively close to the stock price. The protective put provides investors
with a 'uaranteed sellin' price %or their stock. &ithout the put0 the sellin' value o% the stock
could 'o as low as <ero.
Feed.ack? Ce%er to section 25.1

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Bloom's: A//l#%at#on
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.o/#%: 0rote%t#*e /ut

25-35
Chapter 25 - Option Valuation
44. /denti%y the %ive varia.les that a%%ect the value o% an )"erican put option and indicate how
an increase in each o% the varia.les will a%%ect the value o% the put. )lso indicate the co""on
na"e0 i% any0 'iven to each varia.le.

Feed.ack? Ce%er to section 25.1

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45. ,$plain how an increase in T-.ill rates will a%%ect the value o% an )"erican call and an
)"erican put.
)n increase in the risk-%ree rate will increase the value o% an )"erican call option and
decrease the value o% an )"erican put option. !owever0 any chan'e in the option value will
.e so"ewhat li"ited 'iven a nor"al ran'e o% "arket interest rates.
Feed.ack? Ce%er to section 25.1

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.o/#%: '/t#on #n/uts

25-33
Chapter 25 - Option Valuation
43. ,$plain why %inancial "er'ers tend to .ene%it .ondholders "ore than shareholders.
Financial "er'ers tend to lower the risk o% de%ault .y lowerin' the volatility o% the co".ined
%ir"2s return on assets. *y lowerin' de%ault risk0 the value o% the %ir"2s de.t rises0 which in
turn lowers the value o% the %ir"2s e=uity.
Feed.ack? Ce%er to section 25.5

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.o/#%: 9#nan%#al mer!er


Multiple Choice Questions

44. Jou need $120 in 3 years. !ow "uch will you need to deposit today i% you can earn 11
percent per year0 co"pounded continuously( )ssu"e this is the only deposit you "ake.
). $30.
*. $3048.5
C. $3014;.25
D. $3022.22
,. $30415.3;
-V L $120 e
-.11637
L $3022.22

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
3'C :: +,-+
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: Cont#nuous %om/ound#n!

25-34
Chapter 25 - Option Valuation
48. ) stock is sellin' %or $3 per share. ) call option with an e$ercise price o% $34 sells %or
$1.11 and e$pires in 4 "onths. The risk-%ree rate o% interest is 2.8 percent per year0
co"pounded continuously. &hat is the price o% a put option with the sa"e e$ercise price and
e$piration date(
). $8.;;
*. $;.21
C. $;.44
D. $;.3;
,. $;.;4
$3 E - L $34e
-6.28761D17
E $1.11M - L $;.3;

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
3'C :: +,-1
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

4;. ) put option that e$pires in ei'ht "onths with an e$ercise price o% $54 sells %or $1.85. The
stock is currently priced at $5;0 and the risk-%ree rate is 1.1 percent per year0 co"pounded
continuously. &hat is the price o% a call option with the sa"e e$ercise price and e$piration
date(
). $3.34
B. $4.2
C. $4.14
+. $4.41
,. $4.8
$5; E $1.85 L $54 e
-6.11762D17
E CM C L $4.2

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
3'C :: +,-5
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

25-38
Chapter 25 - Option Valuation

25-3;
Chapter 25 - Option Valuation


8. &hat is the price o% a put option 'iven the %ollowin' in%or"ation(

). $13.54
*. $13.81
C. $14.44
+. $18.44
,. $1;.2
d1 L Nln 6$81D$887 E 6.4 E .34
2
D27 .5ODN.34 6.5
1D2
7O L .841
d2 L .841 - N.34 6.5
1D2
7O L -.1352
A6d17 L .5148
A6d27 L .1545
C L $816.51487 - 6$88e
-.46.57
7 6.15457 L $12.48
- L $88e
-.46.57
E $12.48 - $81 L $14.44

AACSB: Analyt#%
Bloom's: Analys#s
"#$$#%ulty: Bas#%
3'C :: +,-;
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.+
.o/#%: Bla%4-S%holes

25-4
Chapter 25 - Option Valuation
81. &hat is the delta o% a put option 'iven the %ollowin' in%or"ation(

). -.385
B. -.115
C. .115
+. .525
,. .385
d1 L Nln 6$;D$857 E 6.4 E .5
2
D27 61D127ODN.5 61D127
1D2
O L .4812
A6d17 L .385
-ut delta L .385 - 1 L -.115

AACSB: Analyt#%
Bloom's: Analys#s
"#$$#%ulty: Bas#%
3'C :: +,-10
&earn#n! '()e%t#*e: +,-+
Se%t#on: +,.1
.o/#%: '/t#on delta

25-41
Chapter 25 - Option Valuation
82. Jou own a lot in 9ey &est0 Florida0 that is currently unused. 5i"ilar lots have recently
sold %or $1.2 "illion. Over the past %ive years0 the price o% land in the area has increased 1
percent per year0 with an annual standard deviation o% 21 percent. ) .uyer has recently
approached you and wants an option to .uy the land in the ne$t ; "onths %or $10110. The
risk-%ree rate o% interest is 4 percent per year0 co"pounded continuously. !ow "uch should
you char'e %or the option( (Round your answer to the nearest $1,000.)
). $520
*. $580
C. $310
+. $420
E. $440
d1 L Nln 6$1020D$101107 E 6.4 E .21
2
D27 6.457ODN.21 6.45
1D2
7O L -.44154
d2 L -.44154 - N.21 6.45
1D2
7O L -.2431
A6d17 L .43;1
A6d27 L .1;11
C L $10206.43;17 - 6$10110e
-.46.457
7 6.1;117 L $430;;.55 $440

AACSB: Analyt#%
Bloom's: Analys#s
"#$$#%ulty: Bas#%
3'C :: +,-11
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: Bla%4-S%holes and asset *alue

25-42
Chapter 25 - Option Valuation
81. ) call option with an e$ercise price o% $11 and 3 "onths to e$piration has a price o%
$1.44. The stock is currently priced at $14.;;0 and the risk-%ree rate is 1 percent per year0
co"pounded continuously. &hat is the price o% a put option with the sa"e e$ercise price and
e$piration date(
). $11.8;
*. $14.54
C. $15.24
+. $15.3;
E. $13.12
$14.;; E - L $11e
-.16.57
E $1.44M - L $13.12

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
3'C :: +,-15
&earn#n! '()e%t#*e: +,-1
Se%t#on: +,.1
.o/#%: 0ut-%all /ar#ty

25-41
Chapter 25 - Option Valuation
84. ) call option "atures in nine "onths. The underlyin' stock price is $;50 and the stock2s
return has a standard deviation o% 1; percent per year. The risk-%ree rate is 1 percent per year0
co"pounded continuously. The e$ercise price is $. &hat is the price o% the call option(
). $15.;4
*. $52.14
C. $53.14
+. $;2.21
E. $;5.
/% the e$ercise price is e=ual to <ero0 the call price will e=ual the stock price0 which is $;5.

AACSB: Analyt#%
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85. ) stock is currently priced at $45. ) call option with an e$piration o% one year has an
e$ercise price o% $3. The risk-%ree rate is 14 percent per year0 co"pounded continuously0 and
the standard deviation o% the stock2s return is in%initely lar'e. &hat is the price o% the call
option(
). $1;.44
*. $42.8
C. $45.
+. $52.31
,. $3.
/% the standard deviation is in%inite0 d1 'oes to positive in%inity so A6d17 'oes to 10 and d2 'oes
to ne'ative in%inity so A6d27 'oes to . /n this case0 the call price is e=ual to the stock price0
which is $45.

AACSB: Analyt#%
Bloom's: A//l#%at#on
"#$$#%ulty: Bas#%
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25-44
Chapter 25 - Option Valuation
83. 5un.urn 5unscreen has a <ero coupon .ond issue outstandin' with a $10 %ace value
that "atures in one year. The current "arket value o% the %ir"2s assets is $103. The
standard deviation o% the return on the %ir"2s assets is 4 percent per year0 and the annual risk-
%ree rate is 4 percent per year0 co"pounded continuously. &hat is the "arket value o% the
%ir"2s de.t .ased on the *lack-5choles "odel( (Round your answer to the nearest $100.)
). $30415.1
*. $30;
C. $801
+. $808
,. $;02
d1 L Nln 6$103D$107 E 6.4 E .4
2
D27 1ODN.4 61
1D2
7O L .524
d2 L .524 - N.4 61
1D2
7O L .124
A6d17 L .3;84
A6d27 L .548
,=uity L $1036.3;847 - 6$10e
-.4617
7 6.5487 L $202;3.5
+e.t L $103 - $202;3.5 L $8011.5 $801

AACSB: Analyt#%
Bloom's: Analys#s
"#$$#%ulty: 2ntermed#ate
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&earn#n! '()e%t#*e: +,-5
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25-45
Chapter 25 - Option Valuation
84. Frost.ite Ther"al &ear has a <ero coupon .ond issue outstandin' with a %ace value o%
$20 that "atures in one year. The current "arket value o% the %ir"2s assets is $210. The
standard deviation o% the return on the %ir"2s assets is 52 percent per year0 and the annual risk-
%ree rate is 3 percent per year0 co"pounded continuously. &hat is the "arket value o% the
%ir"2s e=uity .ased on the *lack-5choles "odel( (Round your answer to the nearest $100.)
). $304
B. $304
C. $30;
+. $40
,. $402
d1 L Nln 6$210D$207 E 6.3 E .52
2
D27 1ODN.52 61
1D2
7O L .3442
d2 L .3442 - N.52 61
1D2
7O L .1242
A6d17 L .441
A6d27 L .54;4
,=uity L $2106.4417 - 6$20e
-.3617
7 6.54;47 L $30344.83 $304

AACSB: Analyt#%
Bloom's: Analys#s
"#$$#%ulty: Bas#%
3'C :: +,-+0
&earn#n! '()e%t#*e: +,-5
Se%t#on: +,.5
.o/#%: 36u#ty as an o/t#on

25-43