Question 1

The Black-Scholes model is a discrete time model.

Accepted Answer

A) True 
 B)False  False

Question 2

To find the beta of a call option, one can calculate the portfolio beta of the replicating stock and risk-free loan.

Accepted Answer

A) True 
 B)False  True

Question 3

If the value of d2 is −0.5, then the value of N(d2)is:

Accepted Answer

A) 0.1915. 
B) 0.6915. 
C) 0.3085. 
D) 0.8085. 
A) 0.1915. 
B) 0.6915. 
C) 0.3085. 
D) 0.8085. C

Question 4

Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40. What is the current value of a six-month call option with an exercise price of $12? The six-month risk-free interest rate is 5 percent per six-month period. (Use the risk-neutral valuation method.)

Accepted Answer

A) $9.78 
B) $10.28 
C) $16.88 
D) $13.33 
A) $9.78 
B) $10.28 
C) $16.88 
D) $13.33

Question 5

Briefly discuss risk-neutral valuation in the context of option valuation.

Accepted Answer

The valuation method that uses risk-neut

Question 6

Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $60. What is the current value of a six-month call option with an exercise price of $50? The six-month risk-free interest rate is 2 percent (periodic rate).

Accepted Answer

A) $5.39 
B) $15.00 
C) $8.25 
D) $8.09 
A) $5.39 
B) $15.00 
C) $8.25 
D) $8.09

Question 7

Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40. What is the current value of a six-month call option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period. (Use the replicating portfolio method.)

Accepted Answer

A) $8.73 
B) $10.28 
C) $16.88 
D) $13.33 
A) $8.73 
B) $10.28 
C) $16.88 
D) $13.33

Question 8

Briefly explain why the discounted cash-flow method (DCF)does not work for valuing options.

Accepted Answer

Two steps comprise the discounted cash f

Question 9

Suppose the exchange rate between the U.S. dollar and the British pound is $1.50 = £1.00. If the UK interest rate is 6 percent per year, what is the adjusted price of the British pound when valuing an option to buy sterling with an expiration of one year?

Accepted Answer

A) $1.9050 
B) $1.4151 
C) $0.7067 
D) $1.5900 
A) $1.9050 
B) $1.4151 
C) $0.7067 
D) $1.5900

Question 10

The term [N(d2)× PV(EX)] in the Black-Scholes model represents the

Accepted Answer

A) call option delta. 
B) bank loan. 
C) put option delta. 
D) present value of a bank loan. 
A) call option delta. 
B) bank loan. 
C) put option delta. 
D) present value of a bank loan.

Question 11

For a European option, Value of put = (value of call)− share price + PV (exercise price).

Accepted Answer

A) True 
 B)False

Question 12

If the standard deviation of the continuously compounded returns on the asset is 40 percent and the interval is a year, then the downside change is equal to

Accepted Answer

A) −27.4 percent. 
B) −53.6 percent. 
C) −33 percent. 
D) −38.7 percent. 
A) −27.4 percent. 
B) −53.6 percent. 
C) −33 percent. 
D) −38.7 percent.

Question 13

Important assumptions justifying the Black-Scholes formula include:
I.The price of the underlying asset follows a lognormal random walk.
II.Investors can adjust their hedge ratio continuously and at no cost.
III.The risk-free rate is known.
IV.The underlying asset does not pay dividends.

Accepted Answer

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

Question 14

Why does the Black-Scholes call formula use the present value of the exercise price and not merely the exercise price in the formula?

Accepted Answer

A) All finance must use the time value of money. 
B) Call options are rarely exercised early. 
C) The present value accounts for a potential dividend. 
D) The put option uses the future value. 
A) All finance must use the time value of money. 
B) Call options are rarely exercised early. 
C) The present value accounts for a potential dividend. 
D) The put option uses the future value.

Question 15

A put option on ABC stock currently sells for $4.00. The exercise price and the stock price is $60. The put option has a delta of 0.5. If within a short period of time the stock price increases to $60.10, what would be the change in the price of the put option?

Accepted Answer

A) Increases by $0.05 
B) Decreases by $0.05 
C) Increases by $0.10 
D) Decreases by $0.10 
A) Increases by $0.05 
B) Decreases by $0.05 
C) Increases by $0.10 
D) Decreases by $0.10

Question 16

The delta of a put option equals the delta of an equivalent call option minus one.

Accepted Answer

A) True 
 B)False

Question 17

A knock-in barrier option might be used if the investor is looking to reduce the cost of buying a call option.

Accepted Answer

A) True 
 B)False

Question 18

Suppose Carol's stock price is currently $20. In each six-month period it will either fall by 50 percent or rise by 100 percent. What is the current value of a one-year call option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period. [Use the two-stage binomial method.]

Accepted Answer

A) $8.73 
B) $10.03 
C) $16.88 
D) $13.33 
A) $8.73 
B) $10.03 
C) $16.88 
D) $13.33

Question 19

A call option on ABCD stock, with an exercise price of $50, will either be worth $12 or worthless. The call option has a delta of 0.3. What is the binomial spread of possible stock prices?

Accepted Answer

A) Low of $22 and high of $62 
B) Low of $50 and high of $62 
C) Low of $58 and high of $62 
D) Low of $38 and high of $62 
A) Low of $22 and high of $62 
B) Low of $50 and high of $62 
C) Low of $58 and high of $62 
D) Low of $38 and high of $62

Question 20

Briefly explain the term option delta.

Accepted Answer

The option delta is the ratio

Exam 21: Valuing Options

The Black-Scholes model is a discrete time model.

To find the beta of a call option, one can calculate the portfolio beta of the replicating stock and risk-free loan.

If the value of d2 is −0.5, then the value of N(d2)is:

Briefly discuss risk-neutral valuation in the context of option valuation.

Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $60. What is the current value of a six-month call option with an exercise price of $50? The six-month risk-free interest rate is 2 percent (periodic rate).

Briefly explain why the discounted cash-flow method (DCF)does not work for valuing options.

Suppose the exchange rate between the U.S. dollar and the British pound is $1.50 = £1.00. If the UK interest rate is 6 percent per year, what is the adjusted price of the British pound when valuing an option to buy sterling with an expiration of one year?

The term [N(d2)× PV(EX)] in the Black-Scholes model represents the

For a European option, Value of put = (value of call)− share price + PV (exercise price).

If the standard deviation of the continuously compounded returns on the asset is 40 percent and the interval is a year, then the downside change is equal to

Important assumptions justifying the Black-Scholes formula include: I.The price of the underlying asset follows a lognormal random walk. II.Investors can adjust their hedge ratio continuously and at no cost. III.The risk-free rate is known. IV.The underlying asset does not pay dividends.

Why does the Black-Scholes call formula use the present value of the exercise price and not merely the exercise price in the formula?

A put option on ABC stock currently sells for $4.00. The exercise price and the stock price is $60. The put option has a delta of 0.5. If within a short period of time the stock price increases to $60.10, what would be the change in the price of the put option?

The delta of a put option equals the delta of an equivalent call option minus one.

A knock-in barrier option might be used if the investor is looking to reduce the cost of buying a call option.

A call option on ABCD stock, with an exercise price of $50, will either be worth $12 or worthless. The call option has a delta of 0.3. What is the binomial spread of possible stock prices?

Briefly explain the term option delta.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

If the value of d₂ is −0.5, then the value of N(d₂)is:

The term [N(d₂)× PV(EX)] in the Black-Scholes model represents the