# FIN534 Week 11Part 1

Aug 9th, 2016
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Question 1 Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options? The higher the strike price on XYZ's options, the higher the option's price will be. Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend The price of these call options is likely to rise if XYZ's stock price rises Question 2 Suppose you believe that Florio Company's stock price is going to decline from its current level of \$82.50 sometime during the next 5 months. For \$5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of \$85 per share. If you bought this opt

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FIN534 Week 11Part 1Question 1Which of the following statements is most correct, holding other things constant, for XYZCorporation's traded call options?The higher the strike price on XYZ's options, the higher the option's price will be.Assuming the same strike price, an XYZ call option that expires in one month will sell at ahigher price than one that expires in three months.If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strikeprice of the option will be reduced by the amount of the dividendThe price of these call options is likely to rise if XYZ's stock price risesQuestion 2Suppose you believe that Florio Company's stock price is going to decline from its current levelof \$82.50 sometime during the next 5 months. For \$5.10 you could buy a 5-month put optiongiving you the right to sell 1 share at a price of \$85 per share. If you bought this option for \$5.10and Florio's stock price actually dropped to \$60, what would your pre-tax net profit be?-\$5.10\$19.90\$20.90\$22.50\$27.60Question 3Which of the following statements is CORRECT?If the underlying stock does not pay a dividend, it does not make good economic sense toexercise a call option prior to its expiration date, even if this would yield an immediate profit.Call options generally sell at a price greater than their exercise value, and the greater the exercisev

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