Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134202648
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 20, Problem 1P

Explain the meanings of the following financial terms:

  1. a. Option
  2. b. Expiration date
  3. c. Strike price
  4. d. Call
  5. e. Put

a)

Expert Solution
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Summary Introduction

To discuss: The meaning of option.

Introduction:

A type of financial security whose value is derived from the value of a particular underlying asset is termed as derivative. This form of financial security consists of two or more parties who enter into an agreement to purchase or sell an asset at a specific price on a particular period. They are four types of derivative securities that are as follows:

  • Forward contract
  • Future contract
  • Swap
  • Option

Explanation of Solution

Option is a contract that involves the act of purchase a financial asset from one party and selling it to another party on an agreed price for a future date. There are two types of options. They are as follows:

  • An option that buys an asset is called as call option
  • An option that sells an asset is called as put option.

b)

Expert Solution
Check Mark
Summary Introduction

To discuss: The meaning of expiration date.

Explanation of Solution

The last day or date, wherein the holder of a financial security has a right to exercise a particular option is termed as expiration date. In case of Country AM’s option, the right of the holder is exercised until the expiration date, whereas in Country E’s option, the option is exercised only on the expiration date.

c)

Expert Solution
Check Mark
Summary Introduction

To discuss: The meaning of strike price.

Explanation of Solution

A particular price at which the option holder has the right to sell or purchase a specified asset is termed as strike price. It is also termed as exercise price.

d)

Expert Solution
Check Mark
Summary Introduction

To discuss: The meaning of call option.

Explanation of Solution

The right of an individual to purchase an asset at the price that is fixed and at a specific period is the call option.

e)

Expert Solution
Check Mark
Summary Introduction

To discuss: The meaning of put option.

Explanation of Solution

Put option is a contract that is made by two investors to sell or buy an underlying asset. This option is constructed to mitigate the downside risk of an underlying asset.

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Chapter 20 Solutions

Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)

Ch. 20.5 - Is it ever optimal to exercise an American call on...Ch. 20.5 - When might it be optimal to exercise an American...Ch. 20.5 - Prob. 3CCCh. 20.6 - Explain how equity can be viewed as a call option...Ch. 20.6 - Explain how debt can be viewed as an option...Ch. 20 - Explain the meanings of the following financial...Ch. 20 - What is the difference between a European option...Ch. 20 - Below is an option quote on IBM from the CBOE Web...Ch. 20 - Prob. 4PCh. 20 - Prob. 5PCh. 20 - You own a call option on Intuit stock with a...Ch. 20 - Assume that you have shorted the call option in...Ch. 20 - You own a put option on Ford stock with a strike...Ch. 20 - Assume that you have shorted the put option in...Ch. 20 - What position has more downside exposure: a short...Ch. 20 - Consider the October 2015 IBM call and put options...Ch. 20 - You are long both a call and a put on the same...Ch. 20 - You are long two calls on the same share of stock...Ch. 20 - A forward contract is a contract to purchase an...Ch. 20 - You own a share of Costco stock. You are worried...Ch. 20 - Dynamic Energy Systems stock is currently trading...Ch. 20 - You happen to be checking the newspaper and notice...Ch. 20 - In mid-February 2016, European-style options on...Ch. 20 - Suppose Amazon stock is trading for 500 per share,...Ch. 20 - Consider the data for IBM options in Problem 3....Ch. 20 - You are watching the option quotes for your...Ch. 20 - Explain why an American call option on a...Ch. 20 - Consider an American put option on XAL stock with...Ch. 20 - The stock of Harford Inc. is about to pay a 0.30...Ch. 20 - Suppose the SP 500 is at 900, and a one-year...Ch. 20 - Suppose the SP 500 is at 900, and it will pay a...Ch. 20 - Prob. 29PCh. 20 - Suppose that in July 2009, Google were to issue 96...
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