Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 22, Problem 7CQ
Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock. Explain.
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Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuingthe stock because it can be diversified away; therefore, it is also irrelevant for valuing a call optionon the stock. Explain
If underlying is non-dividend paying, then the time value of an American call option is positive, hence American call should never be exercised early.
True
False
"Financial Derivative and Risk Management"
Why are the probabilities of stock price movements not used in the Binomial Option Pricing Model for calculating an option's price? What variables are used? Explain in detail with an example.
Chapter 22 Solutions
Corporate Finance
Ch. 22 - Options What is a call option? A put option? Under...Ch. 22 - Options Complete the following sentence for each...Ch. 22 - American and European Options What is the...Ch. 22 - Intrinsic Value What is the intrinsic value of a...Ch. 22 - Option Pricing You notice that shares of stock in...Ch. 22 - Options and Stock Risk If the risk of a stock...Ch. 22 - Option Risk True or false: The unsystematic risk...Ch. 22 - Prob. 8CQCh. 22 - Option Price and Interest Rates Suppose the...Ch. 22 - Contingent Liabilities When you take out an...
Ch. 22 - Options and Expiration Dates What is the impact of...Ch. 22 - Options and Stock Price Volatility What is the...Ch. 22 - Insurance as an Option An insurance policy is...Ch. 22 - Equity as a Call Option It is said that the equity...Ch. 22 - Prob. 15CQCh. 22 - Put Call Parity You find a put and a call with the...Ch. 22 - Put- Call Parity A put and a call have the same...Ch. 22 - Put- Call Parity One thing put-call parity tells...Ch. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
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- The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases. Select one: True Falsearrow_forward3) Understanding if a stock is undervalued or overvalued will influence if the investor will invest in the stock at the current moment of the analysis. T/Farrow_forwardIf a stock’s market value exceeds its book value, then the stock is overpriced. Do you agree? Explain.arrow_forward
- f) discuss the two assumptions underlying the analysis of option strategies: a) the stock pays no dividends, and b) there are no taxes or transaction costs. g) demonstrate an understanding of the position of buying or writing a call by identifying breakeven stock price, maximum profit, and maximum loss. h) demonstrate an understanding of the position of buying or writing a put by identifying the breakeven stock price, the maximum profit, and the maximum loss. i) define a covered call. j) demonstrate an understanding of the position of writing a covered call by identifying breakeven stock price, maximum profit, and maximum loss.arrow_forwardThe buyer of a Put Option, is obligated to sell the underlying stock at maturity. True Falsearrow_forwardWhich of the following is NOT true? a. If the choice is cash, a liability has to be recorded until the SARS are exercised. b. Stock options will almost always have value, whereas restricted stock may not. C. An option-pricing model is not used for valuing restricted stock. d. An executive receiving restricted stock is given the stock prior to vesting.arrow_forward
- How is the intrinsic value of the call option impacted as the stock price changes? How is the time value of the call option impacted as the stock price changes?arrow_forwardWhich of the following is TRUE? An American call option on a stock should never be exercised early O An American call option on a stock should not be exercised early when no dividends are expected O It can be optimal to exercise early an American call option on a stock when no dividends are expected and there is no liquidity or portfolio rebalancing need. O An American call option on a stock should be exercised early when no dividends are expectedarrow_forwardWhy should stock market investors ignore specific risks when calculating required rates of return? There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.arrow_forward
- If the fair value of a stock is more than its market value, which of the following is a reasonable conclusion? a. The stock has a low level of risk b. The stock offers a high dividend payout ratio c. The market is undervaluing the stock d. The market is overvaluing the stockarrow_forwardExplain why the risk premium of a stock does not depend on its diversifiable risk. Question content area bottom Part 1 (Select the best choice below.) A. Investors don't care about diversifiable risk and so don't hold any. B. Investors care about diversifiable risk, but hedge their positions so they don't demand a risk premium. C. Although investors must hold diversifiable risk, they don't care about it, so there is no risk premium. D. Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.arrow_forwardWhat is the difference between a diversifiable riskand a nondiversifiable risk? Should stock portfoliomanagers try to eliminate both types of risk?arrow_forward
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