Question 1

If the standard deviation of the continuously compounded returns (σ)on a stock is 40 percent, and the time interval is a year, then the upside change equals

Accepted Answer

A) 88.2 percent. 
B) 8.7 percent. 
C) 63.2 percent. 
D) 49.2 percent. 
A) 88.2 percent. 
B) 8.7 percent. 
C) 63.2 percent. 
D) 49.2 percent.

Question 2

If the delta of a call option is 0.4, calculate the delta of an equivalent put option.

Accepted Answer

A) 0.6 
B) 0.4 
C) −0.4 
D) −0.6 
A) 0.6 
B) 0.4 
C) −0.4 
D) −0.6

Question 3

What does an equity option's delta reflect?

Accepted Answer

A) The volatility of the underlying stock price 
B) The dividends paid to the underlying stockholders 
C) The number of shares needed to replicate one call option 
D) The time to expiration 
A) The volatility of the underlying stock price 
B) The dividends paid to the underlying stockholders 
C) The number of shares needed to replicate one call option 
D) The time to expiration

Question 4

Briefly explain what is meant by risk-neutral probability.

Accepted Answer

The risk-neutral probability provides ce

Question 5

The Black-Scholes formula represents the option delta as

Accepted Answer

A) d1. 
B) N(d1). 
C) d2. 
D) N(d2). 
A) d1. 
B) N(d1). 
C) d2. 
D) N(d2).

Question 6

One should use a multiperiod binomial model to evaluate an American put option because the Black-Scholes formula does not allow for early exercise.

Accepted Answer

A) True 
 B)False

Question 7

The delta of a put option always equals

Accepted Answer

A) the delta of an equivalent call option. 
B) the delta of an equivalent call option with a negative sign. 
C) the delta of an equivalent call option minus one. 
D) the delta of an equivalent call option plus one. 
A) the delta of an equivalent call option. 
B) the delta of an equivalent call option with a negative sign. 
C) the delta of an equivalent call option minus one. 
D) the delta of an equivalent call option plus one.

Question 8

As you increase the time per interval in a binomial model, the result will approach the Black-Scholes model.

Accepted Answer

A) True 
 B)False

Question 9

Briefly explain why a call option is always riskier than a simple investment in the underlying stock.

Accepted Answer

An investment in a call option can be re

Question 10

If e is the base of natural logarithms; (σ)is the standard deviation of the continuously compounded annual returns on the asset; and h is the time to expiration, expressed as a fraction of a year, then the quantity (1 + upside change)is equal to

Accepted Answer

A) e^[(σ)× SQRT(h)]. 
B) e^[h × SQRT(σ)]. 
C) (σ)× e^[SQRT(h)]. 
D) 1/(σ)× e^[SQRT(h)]. 
A) e^[(σ)× SQRT(h)]. 
B) e^[h × SQRT(σ)]. 
C) (σ)× e^[SQRT(h)]. 
D) 1/(σ)× e^[SQRT(h)].

Question 11

Suppose VS's stock price is currently $20. A six-month call option on VS's stock with an exercise price of $15 has a value of $7.14. What is the price of an equivalent put option? The six-month risk-free interest rate is 5 percent per six-month period.

Accepted Answer

A) $1.43 
B) $9.43 
C) $8.00 
D) $12.00 
A) $1.43 
B) $9.43 
C) $8.00 
D) $12.00

Question 12

For Asian options,

Accepted Answer

A) the option is exercisable on discrete dates before maturity. 
B) the option holder chooses as the exercise price any of the asset prices that occurred before the final date. 
C) the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum. 
D) the exercise price is equal to the average of the asset's price during the life of the option. 
A) the option is exercisable on discrete dates before maturity. 
B) the option holder chooses as the exercise price any of the asset prices that occurred before the final date. 
C) the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum. 
D) the exercise price is equal to the average of the asset's price during the life of the option.

Question 13

Briefly explain put-call parity.

Accepted Answer

The relationship between the payoffs of

Question 14

Which of the following statements about implied volatility is true?

Accepted Answer

A) VIX is the implied volatility on the Standard and Poor's index, and VXN is the implied volatility on the New York Stock Exchange Index. 
B) VIX is the implied volatility on the Standard and Poor's index, and VXN is the implied volatility on the NASDAQ index. 
C) VIX is the implied volatility on the NASDAQ index, and VXN is the implied volatility on the Standard and Poor's index. 
D) VIX is the implied volatility on the New York Stock Exchange index, and VXN is the implied volatility on the Standard and Poor's index. 
A) VIX is the implied volatility on the Standard and Poor's index, and VXN is the implied volatility on the New York Stock Exchange Index. 
B) VIX is the implied volatility on the Standard and Poor's index, and VXN is the implied volatility on the NASDAQ index. 
C) VIX is the implied volatility on the NASDAQ index, and VXN is the implied volatility on the Standard and Poor's index. 
D) VIX is the implied volatility on the New York Stock Exchange index, and VXN is the implied volatility on the Standard and Poor's index.

Question 15

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d2.

Accepted Answer

A) +0.0690 
B) −0.0690 
C) +0.5657 
D) −0.5657 
A) +0.0690 
B) −0.0690 
C) +0.5657 
D) −0.5657

Question 16

The binomial option pricing model is a discrete time model.

Accepted Answer

A) True 
 B)False

Question 17

The Black-Scholes option pricing model employs which five parameters?

Accepted Answer

A) Stock price, exercise price, risk-free rate, beta, and time to maturity 
B) Stock price, risk-free rate, beta, time to maturity, and variance 
C) Stock price, risk-free rate, probability of bankruptcy, variance, and exercise price 
D) Stock price, exercise price, risk-free rate, variance, and time to maturity 
A) Stock price, exercise price, risk-free rate, beta, and time to maturity 
B) Stock price, risk-free rate, beta, time to maturity, and variance 
C) Stock price, risk-free rate, probability of bankruptcy, variance, and exercise price 
D) Stock price, exercise price, risk-free rate, variance, and time to maturity

Question 18

For lookback options,

Accepted Answer

A) the option holder must decide before maturity whether the option is a call or a put. 
B) the option holder chooses as the exercise price any of the asset prices that occurred before the final date. 
C) the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum. 
D) the exercise price is equal to the average of the asset's price during the life of the option. 
A) the option holder must decide before maturity whether the option is a call or a put. 
B) the option holder chooses as the exercise price any of the asset prices that occurred before the final date. 
C) the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum. 
D) the exercise price is equal to the average of the asset's price during the life of the option.

Question 19

N(d1)in the Black-Scholes model represents
I.the call option delta;
II.a hedge ratio;
III.the cumulative probability function

Accepted Answer

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

Question 20

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d1.

Accepted Answer

A) 0.3 
B) 0.7214 
C) −0.7214 
D) 0.4967 
A) 0.3 
B) 0.7214 
C) −0.7214 
D) 0.4967

Exam 21: Valuing Options

If the standard deviation of the continuously compounded returns (σ)on a stock is 40 percent, and the time interval is a year, then the upside change equals

If the delta of a call option is 0.4, calculate the delta of an equivalent put option.

What does an equity option's delta reflect?

Briefly explain what is meant by risk-neutral probability.

The Black-Scholes formula represents the option delta as

One should use a multiperiod binomial model to evaluate an American put option because the Black-Scholes formula does not allow for early exercise.

The delta of a put option always equals

As you increase the time per interval in a binomial model, the result will approach the Black-Scholes model.

Briefly explain why a call option is always riskier than a simple investment in the underlying stock.

If e is the base of natural logarithms; (σ)is the standard deviation of the continuously compounded annual returns on the asset; and h is the time to expiration, expressed as a fraction of a year, then the quantity (1 + upside change)is equal to

Suppose VS's stock price is currently $20. A six-month call option on VS's stock with an exercise price of $15 has a value of $7.14. What is the price of an equivalent put option? The six-month risk-free interest rate is 5 percent per six-month period.

For Asian options,

Briefly explain put-call parity.

Which of the following statements about implied volatility is true?

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d2.

The binomial option pricing model is a discrete time model.

The Black-Scholes option pricing model employs which five parameters?

For lookback options,

N(d1)in the Black-Scholes model represents I.the call option delta; II.a hedge ratio; III.the cumulative probability function

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d1.

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

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d₂.

N(d₁)in the Black-Scholes model represents I.the call option delta; II.a hedge ratio; III.the cumulative probability function

A call option with an exercise price of $50 expires in six months, has a stock price of $54, and has a standard deviation of 80 percent. The risk-free rate is 9.2 percent per year annually compounded. Calculate the value of d₁.