Question

MATCHING: debt-to-value ratio	DO AS MANY AS leveraged recapitalization	YOU WISH American options	unlevered equity
Levered equity	at-the-money	call option	hedging
European options	capital structure	financial option	conservation of value principle
intrinsic value	open interest	option premium	portfolio insurance
put-call parity	put option	strike price

1. The relative proportions of debt, equity, and other securities that a firm has outstanding. When corporations raise funds from outside investors, they must choose which type of security to issue. The most common choices are financing through equity alone and financing through a combination of debt and equity.
2. With perfect capital markets, financial transactions neither add nor destroy value, but instead represent a repackaging of risk (and therefore return). It implies that any financial transaction that appears to be a good deal in terms of adding value either is too good to be true or is exploiting some type of market imperfection

3. A measure of the firm’s leverage. This is the fraction of the firm’s total value that does not correspond to equity. If only equity is used the WACC is equal to the unlevered equity cost of capital

4. When a firm repurchases a significant percentage of its outstanding shares by borrowing finds.

5. Equity in a firm with no debt.

6. Equity in a firm that also has debt outstanding.

7. The most common kind, allow their holders to exercise the option on any date up to and including a final expiration date

8. When the exercise price of an option is equal to the current price of the stock

9. Gives the owner the right to buy the asset

10. Allow their holders to exercise the option only on the expiration date

11. Gives its owner the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date

12. Using an option to reduce risk

13. The value an option would have if it expired immediately

14. The total number of outstanding contracts of that option

15. This upfront payment compensates the seller for the risk of loss in the event that the option holder chooses to exercise the option.

16. Using put options on the portfolio of stocks as a whole rather than just a single stock.

17. This relationship between the value of the stock, the bond, and call and put options

18. Gives the owner the right to sell the asset.
19. The price at which the holder buys or sells the share of stock when the option is exercised

Answer 1

Debt to value ratio = A measure of the firm’s leverage. This is the fraction of the firm’s total value that does not correspond to equity. If only equity is used the WACC is equal to the unlevered equity cost of capital

leverage recapitalization = When a firm repurchases a significant percentage of its outstanding shares by borrowing finds.

American option = The most common kind, allow their holders to exercise the option on any date up to and including a final expiration date

unlevered equity = Equity in a firm with no debt.

levered equity = Equity in a firm that also has debt outstanding.

at-the money = When the exercise price of an option is equal to the current price of the stock

call option = Gives the owner the right to buy the asset

hedging = Using an option to reduce risk

European options = Allow their holders to exercise the option only on the expiration date

capital structure = The relative proportions of debt, equity, and other securities that a firm has outstanding. When corporations raise funds from outside investors, they must choose which type of security to issue. The most common choices are financing through equity alone and financing through a combination of debt and equity

financial options = Gives its owner the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date

Conservation of value principle = With perfect capital markets, financial transactions neither add nor destroy value, but instead represent a repackaging of risk (and therefore return). It implies that any financial transaction that appears to be a good deal in terms of adding value either is too good to be true or is exploiting some type of market imperfection

Intrinsic value = The value an option would have if it expired immediately

Open interest = The total number of outstanding contracts of that option

Option premium = This upfront payment compensates the seller for the risk of loss in the event that the option holder chooses to exercise the option

portfolio insurance = Using put options on the portfolio of stocks as a whole rather than just a single stock.

put call parity = This relationship between the value of the stock, the bond, and call and put options

put option = Gives the owner the right to sell the asset.

strike price = The price at which the holder buys or sells the share of stock when the option is exercised