The risk-free rate is 5% and the expected return on a non-dividend-paying stock is 12%. Which of the following is a way of valuing a derivative? ( )
Assume that the expected growth rate for the stock price is 17% and discount the expected payoff at 12%
B. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%
C. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%
D. Assuming that the expected growth rate for the stock price is 12% and discounting the expected payoff at 5%
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When there are two dividends on a stock, Black’s approximation sets the value of an American call option equal to which of the following ( )
A. The value of a European option maturing just before the first dividend
B. The value of a European option maturing just before the second (final) dividend
C. The greater of the values in A and B
D. The greater of the value in B and the value assuming no early exercise
Which of the following was true after 2005? ( )
A. The options never had any affect on a company’s financial statements
B. The value of options which were at-the-money when issued had to be expensed on the income statement
C. The value of options which were at-the-money when issued had to be reported in the notes to the financial statements
D. Options which were at-the-money when issued did not affect a company’s financial statements
Which of the following is true about employee stock options after they have been issued? ( )
A. They have to be revalued every year
B. They have to be revalued every quarter
C. They have to be revalued every day like other derivatives
D. They never have to be revalued
Which of the following is true about a long forward contract( )
A. The contract becomes more valuable as the price of the asset declines
B. The contract becomes more valuable as the price of the asset rises
C. The contract is worth zero if the price of the asset declines after the contract has been entered into
D. The contract is worth zero if the price of the asset rises after the contract has been entered into
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