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90 Cards in this Set
- Front
- Back
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An option that can be exercised any time before expiration date is called
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An American option
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A put gives the owner the right
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but not the obligation to sell an asset at a given price
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The buyer of a call option has the choice to exercise, but the writer of the call option has
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the obligation to deliver the shares at exercise
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Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?
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The owner will not exercise his option
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Which of the following investors would be happy to see the stock price rise sharply?
I. Investor who owns the stock and a put option II. Investor who has sold a put option and bought a call option III. Investor who owns the stock and has sold a call option IV. Investor who has sold a call option |
I and II only -
Investor who owns the stock and a put option AND investor who has sold a put option and bought a call option. |
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The higher the exercise price
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the higher the put price
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If the volatility of the underlying asset decreases, then the
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value of both the put and call option will decrease
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Which of the following features increases the value of a call option?
A. A high interest rate B. A long time to maturity C. A highly variable stock price D. All of the above |
D. All of the above
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The following are the main types of real options:
I. The option to expand if the immediate investment project succeeds II. The option to wait (and learn) before investing III. The option to shrink or abandon a project IV. The option to vary the mix of output of the firm's projection methods |
D. I, II, III, and IV
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What is the formula for hedge ratio?
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Payoff of the portfolio/payoff option
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How do you calculate the portfolio option for the high option?
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High option - Strike price
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If stock prices and interest rates increase, the value of a call will ________.
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Increase
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If stock prices and interest rates increase, the value of a put will ________.
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Decrease
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If stock prices and interest rates decrease, the value of a call will __________.
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Decrease
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If stock prices and interest rates decrease, the value of a put will _______.
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Increase
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If the exercise price and cash dividends increase, the value of a call will _______.
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decrease
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If the exercise price and cash dividends increase, the value of a put will _______.
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increase
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If the exercise price and cash dividends decrease, the value of a call will _______.
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increase
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If the exercise price and cash dividends decrease, the value of a put will _______.
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decrease
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If the time to expiration and stock volatility increases, the value of a call will ______.
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increase
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If the time to expiration and stock volatility increases, the value of a put will ______.
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increase
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If the time to expiration and stock volatility decreases, the value of a call will ______.
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decrease
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If the time to expiration and stock volatility decreases, the value of a put will ______.
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decrease
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What does it mean to "short the option"?
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The writer of the option, takes on the risk
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What does it mean to "long the option"?
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Right to decide
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What is the definition of a call option?
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Gives you the right to purchase the asset at a fixed price by a fixed time
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What is the definition of a put option?
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Gives you the right to sell the option at a fixed price by a fixed time.
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What is an option premium?
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Price or value of an option
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What is another term for exercise price?
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Strike price
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What is the definition of a strike price?
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Period of time or specific date when the option can be used
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What is the definition of a merger?
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Two groups/companies come together
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What is the definition of an aquisition?
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One company buys another
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What are the two types of aquisitions?
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Equity and asset
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What are the three types of mergers?
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Horizontal, vertical, and conglomerate
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What is a horizontal merger?
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2 companies in the same industry merge together
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What is a vertical merger?
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Moving up and down in the supply chain, different goods or services for a specific finished product
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What is a conglomerate merger?
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Buying random companies to diversify or get out of a specific area
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What are 3 good motivations for mergers?
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1.Eliminating inefficiencies
2.Complementary resources 3.Economies of scale |
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What are 2 stupid movitations for mergers?
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1. Creates an artifical boost of EPS
2. Just to diversify |
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If a company is buying another with cash, how do you calculate the new number of shares outstanding?
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It says the same as the company acquiring
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If a company is buying another with equity, how do you calculate the new number of shares outstanding?
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Divide company B's MV by the price of company A's stock.
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If company A is buying company B with equity, how do you calculate the new share price?
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Keep company A's current price
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If company A is buying company B with equity, how do you calculate the new MV?
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add company A and B's current MV's
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If company A is buying company B with cash, how do you calculate the new share price?
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(MV of AB/# sh outstanding)
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If company A is buying company B with cash, how do you calculate the new MV?
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[Company B's MV - (B's # of sh outstanding*Price of A's shares)]
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How do you calculate the P/E?
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Stock price/EPS
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How do you calculate the EPS?
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NI/# shares outstanding
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What are 4 ways to keep your company from being taken over?
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1. White Knight
2. Reverse Merger (Pacman) 3. Macaroni 4. Poison Pill |
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What is a White Knight?
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When a company merges with another company before being taken over
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What is a reverse merger? (pacman)
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When a company tries to take over the same company that is trying to currently take them over
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What is a macaroni?
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Where a company puts provisions in their debt that in case of a take over, all debt must be immediately paid off
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What is a poison pill?
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When a company buys more shares at a discount
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What is a Leveraged Buyout?
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Buying another company using large amounts of debt to meet acquisition costs
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What are three things that LBO's almost always involve?
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1. Large part of the purchase is made with debt
2. Most below investment grade (junk) 3. Firm goes private and shares aren't traded on an open market |
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What types of firms would be targeted for an LBO?
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Firms with:
1. steady cash flows 2. good amount of cash on hand (liquid assets) to pay off debt 3. Lots of goodwill |
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Who benefits from an LBO?
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Shareholders (selling stockholders) because they're being paid a premium
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Who loses from an LBO?
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Bond holders - stuck holding a fixed interest rate
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Gains from LBO's are from (3 things)
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1. tax savings because of high debt servicing
2. loss in value to bond holders 3. Improved performance because of incentives to management |
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What happens during a spin-off?
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Shares of the new company are given to current shareholdsers of the parent company
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What happens during a carve-out?
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Shares of the new company are sold during a public offering (new owners)
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What are the 4 stages of a dividend's life? (in order)
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1. Declaration date
2. Ex. dividend date 3. Date of record 4. Payment date |
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What is the ex dividend date?
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The date you must be a shareholder by in order to get a dividend
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What makes a distribution different than a dividend?
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A distribution is when dividends are paid from debt or existing capital, and a regular dividend is paid from earnings
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What happens during a stock repurchase?
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A company buys back their own shares, which decreases the number of outstanding shares. this is usually done b/c management feels the stock is undervalued.
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What are the 3 ways to repurchase stock?
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1. Open market
2. Tender -offer 3. Targeted repurchase |
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What is an open market repurchase?
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when a company buys back their shares over a certain period of time on the open market
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What is a tender offer repurchase?
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Where a company will repurchase some or all share holders shares. price is usually offered at a premium
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What is a targeted repurchase?
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A certain group is targeted...example: only buy back from management
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What are 6 reasons that repurchases are common?
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1. Concrete Shareholders
2. Sends a positive signal and improves stock price 3. Tax benefits to repurchases 4. Window dressing - boosts EPS or higher option vaue 5. One-time commitment - no long term 6. Flexibility in timing and who participates |
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What are 3 remedies for voluntary reorganization?
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1. Extensions
2. Composition 3. Creditor Control |
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What happens during an extension?
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Creditors spread out payments or give you a grace period in which you can start to pay them back
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What happes during a composition?
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All of the creditors get together and each take a small loss of what is owed
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What happens during creditor control?
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Creditors control spending and can veto every expense (ink/paper)
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What does an assignee do?
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Selected by a judge to liquidate a company
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What does a trustee do?
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gets everything appraised and allocates how much each person will receive
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What are 6 benefits from voluntary reorganization?
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1. Debt and interest payments are put on hold
2. Debt forgiven isn't taxable 3. Tax loss carry forwards are retained in bankruptcy 4. Renogiate wage contracts and waive CBA 5. Can invalidate pension agreements 6. Can void incomplete contracts |
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What are the first 10 absolute priority rules?
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1. Secured Debt holders (up to value of amount owed)
2. Laywers and court fees 3. Employee wages up to $4,800 earned in previous 90 days 4. Employee benefits up to $4,800 earned in previous 90 days 5. Customer deposits up to $1,200 6. Fisherman and farmers for storage costs 7. IRS 8. Debt holders 9. Preferred sharholders 10. common shareholders |
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The buyer of a call option wants the price of the asset to _____.
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Increase
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The seller of a call option wants the price of the asset to _________.
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decrease of stay steady
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The buyer of the put option wants the asset price to _____.
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Decrease
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the seller of a put option wants the asset price to _____.
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Increase or stay the same.
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16. If dividends are taxed more heavily than capital gains, the investors:
A) Should be willing to pay more for stocks with low dividend yields B) Should be willing to pay more for high dividend yields C) Should be willing to pay the same for stocks regardless of the dividend yields D) Cannot be predicted as stock prices fluctuate randomly |
A) Should be willing to pay more for stocks with low dividend yields
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If you are the "long position", you are _______ an option
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buying
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if you are the "short position", you are _________ an option
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selling
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As the exercise price increases the value of a call will _____ and the value of a put will ______.
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Decrease, Increase
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As the cash dividends increase, the value of a call will ______ and the value of a put will ______.
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Decrease, Increase
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As the time to expiration increases, the value of a call will ________ and the value of a put will ________.
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Increase, Increase
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As the stock volatilty increases, the value of a call will _______ and the value of a put will ________.
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Increase, Increase
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As the stock prices increases, the value of a call will _________ and the value of a put will _________.
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Increase, Decrease
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As the interest rates increase, the value of a call will ______ and the value of a put will ________.
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Increase, Decrease
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