Define each of the following terms:
- a. Option; call option; put option
- b. Exercise value; strike price
- c. Black-Scholes option pricing model
a)

To discuss: Option, put option and call option
Explanation of Solution
Call option is an option to purchase or buy a specific number of shares of security within a future period.
Put option is an option to sell a specific number of shares of security within a future period.
The option contract’s market price is termed as the option price.
b)

To discuss: The term exercise value and strike price
Explanation of Solution
Exercise value is a value of a call option where it is exercised today. It is the value of current stock price minus the strike price.
Strike price is a price which is stated in the option contract. It is the price the securities are bought and sold.
c)

To discuss: The Black-Scholes option pricing model
Explanation of Solution
This model is used by option traders mainly to value the options. It is derived through a concept of riskless hedge.
By purchasing shares of a stock and selling the call option on the stock simultaneously will create a risk-free investment. This return should equal the arbitrage opportunity or risk-free rate will exist.
Want to see more full solutions like this?
Chapter 5 Solutions
Intermediate Financial Management
- No chatgpt! A portfolio's risk can be reduced by: A) Investing in a single stock B) Diversifying investments across different asset classes C) Borrowing money to invest more D) Only investing in high-risk assets need help!arrow_forwardNo chatgpt!! A portfolio's risk can be reduced by:A) Investing in a single stockB) Diversifying investments across different asset classesC) Borrowing money to invest moreD) Only investing in high-risk assetsarrow_forwardNo chatgpt!! A company’s ability to meet its short-term financial obligations is referred to as: A) ProfitabilityB) LiquidityC) SolvencyD) Efficiency solvearrow_forward
- No ai A company’s ability to meet its short-term financial obligations is referred to as: A) ProfitabilityB) LiquidityC) SolvencyD) Efficiencyarrow_forwardDo not Ai What does the internal rate of return (IRR) indicate for a project?A) The time it takes to recover the initial investmentB) The rate at which the project's net present value (NPV) equals zeroC) The total profit earned over the project's lifeD) The cash flow generated in the first yeararrow_forwardNo ai tool. Which of the following is considered a risk-free investment? A) Corporate bonds B) Treasury bills C) Preferred stocks D) Real estate help me.arrow_forward
- No chatgpt tool. Which of the following is considered a risk-free investment?A) Corporate bondsB) Treasury billsC) Preferred stocksD) Real estatearrow_forwardNo AI What is the primary purpose of a company's capital budgeting process?A) To manage day-to-day operationsB) To evaluate long-term investment projectsC) To determine short-term borrowing needsD) To forecast cash flow help mearrow_forwardNo Ai The time value of money concept is based on which of the following principles?A) Money received today is worth less than money received in the futureB) Money received today is worth more than money received in the futureC) Money has no change in value over timeD) Money received in the future is equivalent to money today need answer.arrow_forward
- Please do not use chatgpt. The time value of money concept is based on which of the following principles?A) Money received today is worth less than money received in the futureB) Money received today is worth more than money received in the futureC) Money has no change in value over timeD) Money received in the future is equivalent to money today help me.arrow_forwardplease don't use chatgpt. The time value of money concept is based on which of the following principles?A) Money received today is worth less than money received in the futureB) Money received today is worth more than money received in the futureC) Money has no change in value over timeD) Money received in the future is equivalent to money today need help!arrow_forwardno ai tool. The time value of money concept is based on which of the following principles?A) Money received today is worth less than money received in the futureB) Money received today is worth more than money received in the futureC) Money has no change in value over timeD) Money received in the future is equivalent to money todayarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT

