Question 1

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A) 0.60. 
B) 0.40. 
C) -0.60. 
D) -0.40. 
A) 0.60. 
B) 0.40. 
C) -0.60. 
D) -0.40.

Question 2

A put option on the S&P 500 Index will best protect a portfolio

Accepted Answer

A) of 100 shares of IBM stock. 
B) of 50 bonds. 
C) that corresponds to the S&P 500. 
D) of 50 shares of AT&T and 50 shares of Xerox stocks. 
A) of 100 shares of IBM stock. 
B) of 50 bonds. 
C) that corresponds to the S&P 500. 
D) of 50 shares of AT&T and 50 shares of Xerox stocks.

Question 3

Which one of the following variables influences the value of put 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 4

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Accepted Answer

A) the call price would increase. 
B) the call price would decrease. 
C) the call price would not change. 
D) the put price would decrease. 
A) the call price would increase. 
B) the call price would decrease. 
C) the call price would not change. 
D) the put price would decrease.

Question 5

Since deltas change as stock values change, portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

Accepted Answer

A) portfolio insurance. 
B) rebalancing. 
C) option elasticity. 
D) gamma hedging. 
E) dynamic hedging. 
A) portfolio insurance. 
B) rebalancing. 
C) option elasticity. 
D) gamma hedging. 
E) dynamic hedging.

Question 6

A hedge ratio for a put is always

Accepted Answer

A) equal to one. 
B) greater than one. 
C) between zero and one. 
D) between negative one and zero. 
A) equal to one. 
B) greater than one. 
C) between zero and one. 
D) between negative one and zero.

Question 7

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call?

Accepted Answer

A) $8 
B) $12 
C) $6 
D) $4 
A) $8 
B) $12 
C) $6 
D) $4

Question 8

Portfolio A consists of 150 shares of stock and 300 calls on that stock.Portfolio B consists of 575 shares of stock.The call delta is 0.7.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 9

The percentage change in the stock call-option price divided by the percentage change in the stock price is called

Accepted Answer

A) the elasticity of the option. 
B) the delta of the option. 
C) the theta of the option. 
D) the gamma of the option. 
A) the elasticity of the option. 
B) the delta of the option. 
C) the theta of the option. 
D) the gamma of the option.

Question 10

Portfolio A consists of 500 shares of stock and 500 calls on that stock.Portfolio B consists of 800 shares of stock.The call delta is 0.6.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 11

As the underlying stock's price increased, the call option valuation function's slope approaches

Accepted Answer

A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half the value of the stock. 
A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half the value of the stock.

Question 12

Delta neutral

Accepted Answer

A) is the volatility level for the stock that the option price implies. 
B) is the continued updating of the hedge ratio as time passes. 
C) is the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) means the portfolio has no tendency to change value as the underlying portfolio value changes. 
A) is the volatility level for the stock that the option price implies. 
B) is the continued updating of the hedge ratio as time passes. 
C) is the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D) means the portfolio has no tendency to change value as the underlying portfolio value changes.

Question 13

Delta 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. 
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.

Question 14

Other things equal, the price of a stock put 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 15

The intrinsic value of an in-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 16

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

Accepted Answer

A) long 0.85 calls for each short stock. 
B) short 0.85 calls for each long stock. 
C) long 0.85 shares for each short call. 
D) long 0.85 shares for each long call. 
A) long 0.85 calls for each short stock. 
B) short 0.85 calls for each long stock. 
C) long 0.85 shares for each short call. 
D) long 0.85 shares for each long call.

Question 17

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

Accepted Answer

A) positively; positively 
B) negatively; positively 
C) negatively; negatively 
D) positively; negatively 
A) positively; positively 
B) negatively; positively 
C) negatively; negatively 
D) positively; negatively

Question 18

A put option has an intrinsic value of zero if the option is

Accepted Answer

A) at the money. 
B) out of the money. 
C) in the money. 
D) at the money and in the money. 
E) at the money or out of the money. 
A) at the money. 
B) out of the money. 
C) in the money. 
D) at the money and in the money. 
E) at the money or out of the money.

Question 19

The dollar change in the value of a stock call option is always

Accepted Answer

A) lower than the dollar change in the value of the stock. 
B) higher than the dollar change in the value of the stock. 
C) negatively correlated with the change in the value of the stock. 
D) higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. 
A) lower than the dollar change in the value of the stock. 
B) higher than the dollar change in the value of the stock. 
C) negatively correlated with the change in the value of the stock. 
D) higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

Question 20

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

Accepted Answer

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

Exam 21: Option Valuation

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be

A put option on the S&P 500 Index will best protect a portfolio

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

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Since deltas change as stock values change, portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

A hedge ratio for a put is always

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call?

Portfolio A consists of 150 shares of stock and 300 calls on that stock.Portfolio B consists of 575 shares of stock.The call delta is 0.7.Which portfolio has a higher dollar exposure to a change in stock price?

The percentage change in the stock call-option price divided by the percentage change in the stock price is called

Portfolio A consists of 500 shares of stock and 500 calls on that stock.Portfolio B consists of 800 shares of stock.The call delta is 0.6.Which portfolio has a higher dollar exposure to a change in stock price?

As the underlying stock's price increased, the call option valuation function's slope approaches

Delta neutral

Delta is defined as

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

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

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

A put option has an intrinsic value of zero if the option is

The dollar change in the value of a stock call option is always

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

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The price of a stock put option is correlated with the stock price and correlated with the strike price.