Question 1

The gamma 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.

Question 2

Other things equal, the price of a stock put option is positively correlated with the following factors except

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 3

A portfolio consists of 100 shares of stock and 1500 calls on that stock.If the hedge ratio for the call is 0.7, 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) +$700 
B) +$500 
C) -$1,150 
D) -$520 
A) +$700 
B) +$500 
C) -$1,150 
D) -$520

Question 4

An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the intrinsic value of the call?

Accepted Answer

A) $12 
B) $8 
C) $0 
D) $23 
A) $12 
B) $8 
C) $0 
D) $23

Question 5

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Accepted Answer

A) long 0.70 calls for each short stock. 
B) short 0.70 calls for each long stock. 
C) long 0.70 shares for each short call. 
D) long 0.70 shares for each long call. 
A) long 0.70 calls for each short stock. 
B) short 0.70 calls for each long stock. 
C) long 0.70 shares for each short call. 
D) long 0.70 shares for each long call.

Question 6

A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6, 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) +$700 
B) +$500 
C) -$580 
D) -$520 
A) +$700 
B) +$500 
C) -$580 
D) -$520

Question 7

Relative to European puts, otherwise identical American put options

Accepted Answer

A) are less valuable. 
B) are more valuable. 
C) are equal in value. 
D) will always be exercised earlier. 
A) are less valuable. 
B) are more valuable. 
C) are equal in value. 
D) will always be exercised earlier.

Question 8

The price of a stock call 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 9

A hedge ratio for a call option is ________, and a hedge ratio for a put option is ______.

Accepted Answer

A) negative; positive 
B) negative; negative 
C) positive; negative 
D) positive; positive 
A) negative; positive 
B) negative; negative 
C) positive; negative 
D) positive; positive

Question 10

Before expiration, the time value of an at-the-money call option is usually

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.

Question 11

The time value of a put option is I) the difference between the option's price and the value it would have if it were expiring immediately.
II) the same as the present value of the option's expected future cash flows.
III) the difference between the option's price and its expected future value.
IV) different from the usual time value of money concept.

Accepted Answer

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

Question 12

Before 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 13

A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar.

Accepted Answer

A) increase; more than 
B) decrease; more than 
C) decrease; less than 
D) increase; less than 
A) increase; more than 
B) decrease; more than 
C) decrease; less than 
D) increase; less than

Question 14

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

Accepted Answer

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

Question 15

Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies.

Accepted Answer

A) negative; negative 
B) positive; positive 
C) positive; negative 
D) negative; positive 
A) negative; negative 
B) positive; positive 
C) positive; negative 
D) negative; positive

Question 16

A call 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 17

Volatility risk is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the risk incurred from unpredictable changes in volatility. 
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 risk incurred from unpredictable changes in volatility. 
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 18

Before expiration, the time value of an in-the-money put option is always

Accepted Answer

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

Question 19

An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the time value of the call?

Accepted Answer

A) $8 
B) $12 
C) $0 
D) $4 
A) $8 
B) $12 
C) $0 
D) $4

Question 20

The intrinsic value of an out-of-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.

Exam 21: Option Valuation

The gamma of an option is

Other things equal, the price of a stock put option is positively correlated with the following factors except

A portfolio consists of 100 shares of stock and 1500 calls on that stock.If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the intrinsic value of the call?

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Relative to European puts, otherwise identical American put options

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

A hedge ratio for a call option is ________, and a hedge ratio for a put option is ______.

Before expiration, the time value of an at-the-money call option is usually

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

A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar.

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

Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies.

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

Volatility risk is

Before expiration, the time value of an in-the-money put option is always

An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the time value of the call?

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

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Filters

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

A hedge ratio for a call option is __, and a hedge ratio for a put option is .

A $1 decrease in a call option's exercise price would result in a(n) in the call option's value of one dollar.

Higher dividend-payout policies have a impact on the value of the call and a impact on the value of the put compared to lower dividend-payout policies.