24. The value of an option is equal to the: a. intrinsic value minus the time pr

Question

24. The value of an option is equal to the: a. intrinsic value minus the time premium. b. time premium plus the intrinsic value. c. implied standard deviation plus the intrinsic value. d. summation of the intrinsic value, the time premium, and the implied standard deviation. e. summation of delta, theta, vega, and rho. 25. If you consider the equity of a leveraged firm to be an option on the firm's assets then the act of paying off debt is comparable toon the assets of the firm. a. purchasing a put option b. purchasing a call option c. exercising an in-the-money put option d. exercising an in-the-money call option e. selling a call option 26. Shareholders in a leveraged firm might wish to accept a negative net present value project if a. it increases the standard deviation of the returns on the firm's assets. b. it lowers the variance of the returns on the firm's assets. c. it lowers the risk level of the firm. d. it diversifies the cash flows of the firm. e. it decreases the risk that a firm will default on its debt

Explanation / Answer

24) Value of option = Time value premium + intrinsic value

Thus ans b) time premium plus intrinsic value

25) as debt is paid off the value of asset will increase thus if one consider equity of leverage firm to be option it would be call option on firm's asset

Thus ans b) purchasing call option

26) a) it increases the standard deviation of the returns on the firm's assets

Since this way they can expect higher return

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