Question 1

The elasticity of a stock put option is always

Accepted Answer

A) positive. 
B) smaller than one. 
C) negative. 
D) infinite. 
A) positive. 
B) smaller than one. 
C) negative. 
D) infinite. C

Question 2

The elasticity of an option is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
C) the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) the sensitivity of the delta to the stock price. 
A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
C) the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) the sensitivity of the delta to the stock price. C

Question 3

Prior to expiration,

Accepted Answer

A) the intrinsic value of a put option is greater than its actual value. 
B) the intrinsic value of a put option is always positive. 
C) the actual value of a put option is greater than the intrinsic value. 
D) the intrinsic value of a put option is always greater than its time value. 
A) the intrinsic value of a put option is greater than its actual value. 
B) the intrinsic value of a put option is always positive. 
C) the actual value of a put option is greater than the intrinsic value. 
D) the intrinsic value of a put option is always greater than its time value. C

Question 4

Vega is defined as

Accepted Answer

A) the change in the value of an option for a dollar change in the price of the underlying asset. 
B) the change in the value of the underlying asset for a dollar change in the call price. 
C) the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D) the change in the volatility of the underlying stock price. 
E) the sensitivity of an option's price to changes in volatility. 
A) the change in the value of an option for a dollar change in the price of the underlying asset. 
B) the change in the value of the underlying asset for a dollar change in the call price. 
C) the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D) the change in the volatility of the underlying stock price. 
E) the sensitivity of an option's price to changes in volatility.

Question 5

In volatile markets, dynamic hedging may be difficult to implement because

Accepted Answer

A) prices move too quickly for effective rebalancing. 
B) as volatility increases, historical deltas are too low. 
C) price quotes may be delayed so that correct hedge ratios cannot be computed. 
D) volatile markets may cause trading halts. 
E) All of the options are correct. 
A) prices move too quickly for effective rebalancing. 
B) as volatility increases, historical deltas are too low. 
C) price quotes may be delayed so that correct hedge ratios cannot be computed. 
D) volatile markets may cause trading halts. 
E) All of the options are correct.

Question 6

Which of the inputs in the Black-Scholes option pricing model are directly observable?

Accepted Answer

A) The price of the underlying security 
B) The risk-free rate of interest 
C) The time to expiration 
D) The variance of returns of the underlying asset return 
E) The price of the underlying security, risk-free rate of interest, and time to expiration 
A) The price of the underlying security 
B) The risk-free rate of interest 
C) The time to expiration 
D) The variance of returns of the underlying asset return 
E) The price of the underlying security, risk-free rate of interest, and time to expiration

Question 7

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

Accepted Answer

A) decreases; increases 
B) decreases; decreases 
C) increases; decreases 
D) increases; increases 
A) decreases; increases 
B) decreases; decreases 
C) increases; decreases 
D) increases; increases

Question 8

At expiration, the time value of an at-the-money put option is always

Accepted Answer

A) equal to zero. 
B) equal to the stock price minus the exercise price. 
C) negative. 
D) positive. 
A) equal to zero. 
B) equal to the stock price minus the exercise price. 
C) negative. 
D) positive.

Question 9

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

Accepted Answer

A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price 
A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price

Question 10

The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.

Accepted Answer

A) I and II 
B) I and III 
C) II and II 
D) I, II, and IV 
A) I and II 
B) I and III 
C) II and II 
D) I, II, and IV

Question 11

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Accepted Answer

A) -$345 
B) +$500 
C) -$580 
D) -$520 
A) -$345 
B) +$500 
C) -$580 
D) -$520

Question 12

The intrinsic value of an out-of-the-money call option is equal to

Accepted Answer

A) the call premium. 
B) zero. 
C) the stock price minus the exercise price. 
D) the striking price. 
A) the call premium. 
B) zero. 
C) the stock price minus the exercise price. 
D) the striking price.

Question 13

The intrinsic value of an at-the-money call option is equal to

Accepted Answer

A) the call premium. 
B) zero. 
C) the stock price plus the exercise price. 
D) the striking price. 
A) the call premium. 
B) zero. 
C) the stock price plus the exercise price. 
D) the striking price.

Question 14

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

Accepted Answer

A) Portfolio B 
B) Portfolio A 
C) The two portfolios have the same exposure. 
D) Portfolio A if the stock price increases, and portfolio B if it decreases 
A) Portfolio B 
B) Portfolio A 
C) The two portfolios have the same exposure. 
D) Portfolio A if the stock price increases, and portfolio B if it decreases

Question 15

The intrinsic value of an at-the-money put option is equal to

Accepted Answer

A) the stock price minus the exercise price. 
B) the put premium. 
C) zero. 
D) the exercise price minus the stock price. 
A) the stock price minus the exercise price. 
B) the put premium. 
C) zero. 
D) the exercise price minus the stock price.

Question 16

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A) 0.70. 
B) 0.30. 
C) -0.70. 
D) -0.30. 
A) 0.70. 
B) 0.30. 
C) -0.70. 
D) -0.30.

Question 17

At expiration, the time value of an in-the-money call option is always

Accepted Answer

A) equal to zero. 
B) positive. 
C) negative. 
D) equal to the stock price minus the exercise price. 
A) equal to zero. 
B) positive. 
C) negative. 
D) equal to the stock price minus the exercise price.

Question 18

Which one of the following variables influences the value of call options? I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility

Accepted Answer

A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) I, II, III, and IV 
A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) I, II, III, and IV

Question 19

Dynamic hedging is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
C) the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) the sensitivity of the delta to the stock price. 
A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
C) the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) the sensitivity of the delta to the stock price.

Question 20

The elasticity of a stock call option is always

Accepted Answer

A) greater than one. 
B) smaller than one. 
C) negative. 
D) infinite. 
A) greater than one. 
B) smaller than one. 
C) negative. 
D) infinite.

Exam 21: Option Valuation

The elasticity of a stock put option is always

The elasticity of an option is

Prior to expiration,

Vega is defined as

In volatile markets, dynamic hedging may be difficult to implement because

Which of the inputs in the Black-Scholes option pricing model are directly observable?

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

At expiration, the time value of an at-the-money put option is always

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

The intrinsic value of an out-of-the-money call option is equal to

The intrinsic value of an at-the-money call option is equal to

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

The intrinsic value of an at-the-money put option is equal to

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

At expiration, the time value of an in-the-money call option is always

Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

Dynamic hedging is

The elasticity of a stock call option is always

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

If the stock price decreases, the price of a put option on that stock , and that of a call option .