Question 1

If the delta of a call option is 0.6, 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 2

An option holder is not entitled to any dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 3

Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $80. 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) $2.40 
B) $15.00 
C) $8.25 
D) $8.09 
A) $2.40 
B) $15.00 
C) $8.25 
D) $8.09

Question 4

If the standard deviation of the continuously compounded returns on the asset is 30 percent and the interval is a year, then the downside change is equal to

Accepted Answer

A) −26 percent. 
B) −54 percent. 
C) −33 percent. 
D) −39 percent. 
A) −26 percent. 
B) −54 percent. 
C) −33 percent. 
D) −39 percent.

Question 5

The value of N(d), which is used in the Black-Scholes model, can take any value between

Accepted Answer

A) −1 and +1. 
B) 0 and +1. 
C) −1 and 0. 
D) − 0.95 and 0.95. 
A) −1 and +1. 
B) 0 and +1. 
C) −1 and 0. 
D) − 0.95 and 0.95.

Question 6

Relative to the underlying stock, a call option always has:

Accepted Answer

A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return. 
A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return.

Question 7

A stock is currently selling for $50. The stock price could go up by 10 percent or fall by 5 percent each month. The monthly interest rate is 1 percent (periodic rate). Calculate the price of a call option on the stock with an exercise price of $50 and a maturity of two months. (Use the two-stage binomial method.)

Accepted Answer

A) $5.10 
B) $2.71 
C) $4.78 
D) $3.62 
A) $5.10 
B) $2.71 
C) $4.78 
D) $3.62

Question 8

The smaller the time periods used in the binomial model, the closer it will come to approximating the Black-Scholes' model price.

Accepted Answer

A) True 
 B)False

Question 9

All else equal, if an option's strike price increases, then the

Accepted Answer

A) value of a put option increases and that of a call option decreases. 
B) value of a put option decreases and that of a call option increases. 
C) value of both a put option and a call option increase. 
D) value of both a put option and a call option decrease. 
A) value of a put option increases and that of a call option decreases. 
B) value of a put option decreases and that of a call option increases. 
C) value of both a put option and a call option increase. 
D) value of both a put option and a call option decrease.

Question 10

Suppose an investor wishes to "cash-in" an in-the-money American call option (on a nondividend paying stock)that has lots of time until expiration. The investor will be better off trading the option to another investor rather than exercising the option early.

Accepted Answer

A) True 
 B)False

Question 11

The value of a call option increases as the risk-free interest rate increases.

Accepted Answer

A) True 
 B)False

Question 12

Cola Company options have an exercise price of $45 and expire in 156 days. The current price of Cola Company stock is $44.375. The (annually compounded)risk-free rate is 7 percent per year and the standard deviation of Cola Company's stock returns is 0.31. Calculate d2.

Accepted Answer

A) −0.02766 
B) +0.02766 
C) +0.2027 
D) −0.2027 
A) −0.02766 
B) +0.02766 
C) +0.2027 
D) −0.2027

Question 13

A call option has an exercise price of $100. At the exercise date, the stock price could be either $50 or $150. Which investment strategy provides the same payoff as the stock?

Accepted Answer

A) Lend PV of $50 and buy two calls. 
B) Lend PV of $50 and sell two calls. 
C) Borrow $50 and buy two calls. 
D) Borrow $50 and sell two calls. 
A) Lend PV of $50 and buy two calls. 
B) Lend PV of $50 and sell two calls. 
C) Borrow $50 and buy two calls. 
D) Borrow $50 and sell two calls.

Question 14

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

Accepted Answer

A) True 
 B)False

Question 15

All else equal, if the volatility (variance)of the underlying stock increases, then the

Accepted Answer

A) value of a put option increases and that of a call option decreases. 
B) value of a put option decreases and that of a call option increases. 
C) value of both a put option and a call option increase. 
D) value of both a put option and a call option decrease. 
A) value of a put option increases and that of a call option decreases. 
B) value of a put option decreases and that of a call option increases. 
C) value of both a put option and a call option increase. 
D) value of both a put option and a call option decrease.

Exam 21: Valuing Options

If the delta of a call option is 0.6, calculate the delta of an equivalent put option.

An option holder is not entitled to any dividends paid on the underlying stock.

Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $80. 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).

If the standard deviation of the continuously compounded returns on the asset is 30 percent and the interval is a year, then the downside change is equal to

The value of N(d), which is used in the Black-Scholes model, can take any value between

Relative to the underlying stock, a call option always has:

The smaller the time periods used in the binomial model, the closer it will come to approximating the Black-Scholes' model price.

All else equal, if an option's strike price increases, then the

Suppose an investor wishes to "cash-in" an in-the-money American call option (on a nondividend paying stock)that has lots of time until expiration. The investor will be better off trading the option to another investor rather than exercising the option early.

The value of a call option increases as the risk-free interest rate increases.

Cola Company options have an exercise price of $45 and expire in 156 days. The current price of Cola Company stock is $44.375. The (annually compounded)risk-free rate is 7 percent per year and the standard deviation of Cola Company's stock returns is 0.31. Calculate d2.

A call option has an exercise price of $100. At the exercise date, the stock price could be either $50 or $150. Which investment strategy provides the same payoff as the stock?

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

All else equal, if the volatility (variance)of the underlying stock increases, then the

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

Cola Company options have an exercise price of $45 and expire in 156 days. The current price of Cola Company stock is $44.375. The (annually compounded)risk-free rate is 7 percent per year and the standard deviation of Cola Company's stock returns is 0.31. Calculate d₂.