Answer true of false, and justify the answer a) In the framework of valuing an option...
Answer true of false, and justify the answer
a) In the framework of valuing an option to delay an investment, if
the average expected price remains the same, but the probability of
facing a low price next period becomes smaller, then the NPV of
waiting to invest next period will be higher. True or False
b) Any rational investor always prefers a project that gives him,
or her, the option to wait to invest next year instead of a project
that offers a now or never choice. True or False
c) If the uncertainty over prices next period increases, that is,
the gap between the possible high price and the possible low price
next period increases, keeping the average expected price constant,
waiting to invest next period becomes more valuable. True or
False
d) If the stock price at expiration is greater than the exercise
price, the value of the call option at expiration will be zero.
True or False
e) The higher the stock price is at expiration, the lower the value
of the put option will be at expiration. True or False
Homework Answers
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Answer true of false, and justify the answer
a) In the framework of valuing an option...
12) Indicated whether the statements below are true or false by circling the correct option. If...
12) Indicated whether the statements below are true or false by circling the correct option. If the statement is false, rewrite it so that it becomes true. (15 points) a) lonization energy increases from, left to right across a period because effective nuclear charge increases.a duus ncuons hardur to mate e True False b) Electron affinity for elements in group 17 becomes more favorable when moving from fluorine down to iodine. True False c) For the following isoelectronic series, ionic...
True of False? 1.A convertible bond is a corporate bond with a call option to buy...
True of False? 1.A convertible bond is a corporate bond with a call option to buy the common stock of the issuer. 2.The value of a corporate bond without the conversion option is called its straight value. 3.The price that an investor effectively pays for the common stock if the convertible bond is purchased and then converted into the common stock is called the Market Conversion Price. 4.The higher the premium over straight value, the less attractive the convertible bond....
True or False? If we define the “premium” on an option to be the difference between...
True or False? If we define the “premium” on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock’s current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
True or False: You need to explain briefly your answers. (a) (10pts) In the CAPM model,...
True or False: You need to explain briefly your answers. (a) (10pts) In the CAPM model, if a stock lies strictly below the budget line (recall that we label the standard deviation of a stock’s return on the x-axis and the mean of that on the y-axis), then it is for sure that no one will want to hold this stock in his optimal choice since there is always an alternative with less risk or greater expected return. (b) (10pts)If...
2. Exercise value and option price The value derived from exercising an option immediately is the...
2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The...
2. Exercise value and option price The value derived from exercising an option immediately is the...
2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. Consider...
SECTION A Answer any TEN questions in this section. Each question carries THE State 'true' or...
SECTION A Answer any TEN questions in this section. Each question carries THE State 'true' or 'false', and briefly explain your answer. 1. All valuations are subjective. Answer any FOUR marks 2 The CAPM is untestable. 3. A firm with highly volatile cash flows can have low beta 4. A retailer's earnings show a strong seasonal pattern and hence its stock price will also demonstrate seasonality 5. Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE)...
True or False? 1. An increase in SKEW index from CBOE means that skewness is higher than before and that investors have more concern about the extremely negative stock market returns than before. 2. H...
True or False?
1. An increase in SKEW index from CBOE means that skewness is higher than before and that investors have more concern about the extremely negative stock market returns than before. 2. High CDS spread means the default probability of the corporate debt is low. 3. When you invest in the individual stocks with high volatility and positive skewness for the long term, the probability that your portfolio outperforms the riskfree asset becomes higher 4. If the stock...
True/False: Decide whether the following statements are true or false. If a statement is true, just...
True/False: Decide whether the following statements are true or false. If a statement is true, just state that it is true. If a statement is false, state that it is false and restate it so that it becomes an economically meaningful true statement. (15P, 3P each) [Hint: You need to remain in the context of the original statement. So don’t change it into a different true statement such as, “Janet Yellen was the former Chair the US Federal Reserve”]. a....
2. Investment timing options Aa Aa Companies often need to choose between making an investment now...
2. Investment timing options Aa Aa Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $41,000. If market demand is strong, General Forge and Foundry Co. thinks that the project will...
12) Indicated whether the statements below are true or false by circling the correct option. If the statement is false, rewrite it so that it becomes true. (15 points) a) lonization energy increases from, left to right across a period because effective nuclear charge increases.a duus ncuons hardur to mate e True False b) Electron affinity for elements in group 17 becomes more favorable when moving from fluorine down to iodine. True False c) For the following isoelectronic series, ionic...
2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The...
2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. Consider...
SECTION A Answer any TEN questions in this section. Each question carries THE State 'true' or 'false', and briefly explain your answer. 1. All valuations are subjective. Answer any FOUR marks 2 The CAPM is untestable. 3. A firm with highly volatile cash flows can have low beta 4. A retailer's earnings show a strong seasonal pattern and hence its stock price will also demonstrate seasonality 5. Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE)...
True or False?
1. An increase in SKEW index from CBOE means that skewness is higher than before and that investors have more concern about the extremely negative stock market returns than before. 2. High CDS spread means the default probability of the corporate debt is low. 3. When you invest in the individual stocks with high volatility and positive skewness for the long term, the probability that your portfolio outperforms the riskfree asset becomes higher 4. If the stock...
2. Investment timing options Aa Aa Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $41,000. If market demand is strong, General Forge and Foundry Co. thinks that the project will...
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