Answer:
d. The market value of an option depends in part on the option’s length of time until expiration and on the variability of the underlying stock’s price.
Question: There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors that affect call option values? a. The price of call options will rise if XYZ’s stock price rises. b. The higher the strike price, the higher the call option price. c. Assuming the same strike price, a call option that expires in 1 month will sell for a higher price than one that expires in 3 months. d. The less volatile a stock’s price, the more valuable a call option on the stock is. e. If the risk-free rate of interest increases, the value of call options will decrease.
Answer:
a. The price of call options will rise if XYZ’s stock price rises.
Question: The value of a stock option depends on all of the following EXCEPT: a. Exercise price. b. Variability of the stock price. c. Length of time until option expiration. d. Risk-free rate of interest. e. Bond price.
Answer:
e. Bond price.
Question: If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.
Answer Options:
a. True
b. False
Answer:
a. True
Question: An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n) a. Call option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option.
Answer:
a. Call option.
Question: A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The “over-the-counter” market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
Answer Options:
a. True
b. False
Answer:
a. True
Question: In a “Dutch auction” for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the “market clearing price.” All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.
b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
c. The NYSE is an example of an over-the-counter market.
d. Only institutions, and not individuals, can engage in derivative market transactions.
e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
Answer:
e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
Question: In theory, reducing the volatility of its cash flows will always increase a company’s value. a. True b. False
Answer:
b. False