Question 1

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 2

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 3

Use the two-state put-option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______.

Accepted Answer

A)  $0 and $40; −4/7 
B)  $0 and $50; +4/7 
C)  $0 and $40; +4/7 
D)  $0 and $50; −4/7 
E)  $20 and $40; +1/2 
A)  $0 and $40; −4/7 
B)  $0 and $50; +4/7 
C)  $0 and $40; +4/7 
D)  $0 and $50; −4/7 
E)  $20 and $40; +1/2

Question 4

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 5

The elasticity of a stock call option is always

Accepted Answer

A)  greater than one. 
B)  smaller than one. 
C)  negative. 
D)  infinite. 
E)  None of the options are correct. 
A)  greater than one. 
B)  smaller than one. 
C)  negative. 
D)  infinite. 
E)  None of the options are correct.

Question 6

Prior to expiration,

Accepted Answer

A)  the intrinsic value of a put option is greater than its actual value. 
B)  the intrinsic value of a put option is always positive. 
C)  the actual value of a put option is greater than the intrinsic value. 
D)  the intrinsic value of a put option is always greater than its time value. 
A)  the intrinsic value of a put option is greater than its actual value. 
B)  the intrinsic value of a put option is always positive. 
C)  the actual value of a put option is greater than the intrinsic value. 
D)  the intrinsic value of a put option is always greater than its time value.

Question 7

Options sellers who are delta-hedging would most likely

Accepted Answer

A)  sell when markets are falling. 
B)  buy when markets are rising. 
C)  sell when markets are falling and buy when markets are rising. 
D)  sell whether markets are falling or rising. 
E)  buy whether markets are falling or rising. 
A)  sell when markets are falling. 
B)  buy when markets are rising. 
C)  sell when markets are falling and buy when markets are rising. 
D)  sell whether markets are falling or rising. 
E)  buy whether markets are falling or rising.

Question 8

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is −0.30, and the stock is currently selling for $46, what is the elasticity of the put?

Accepted Answer

A)  2.76 
B)  2.30 
C)  −7.67 
D)  −2.76 
E)  −2.30 
A)  2.76 
B)  2.30 
C)  −7.67 
D)  −2.76 
E)  −2.30

Question 9

In volatile markets, dynamic hedging may be difficult to implement because

Accepted Answer

A)  prices move too quickly for effective rebalancing. 
B)  as volatility increases, historical deltas are too low. 
C)  price quotes may be delayed so that correct hedge ratios cannot be computed. 
D)  volatile markets may cause trading halts. 
E)  All of the options are correct. 
A)  prices move too quickly for effective rebalancing. 
B)  as volatility increases, historical deltas are too low. 
C)  price quotes may be delayed so that correct hedge ratios cannot be computed. 
D)  volatile markets may cause trading halts. 
E)  All of the options are correct.

Question 10

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 11

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 
E)  Portfolio B if the stock price increases and portfolio A 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 
E)  Portfolio B if the stock price increases and portfolio A if it decreases

Question 12

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. 
E)  lower 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. 
E)  lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

Question 13

A call option was purchased last month for $2.50 with an exercise price of $45. The option is exercised when the market price of the stock is $48. What is the net profit or loss to the investor?

Accepted Answer

A)  $3.00 
B)  $2.50 
C)  $0.50 
D)  $0.60 
A)  $3.00 
B)  $2.50 
C)  $0.50 
D)  $0.60

Question 14

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. 
E)  None of the options are correct. 
A)  equal to zero. 
B)  negative. 
C)  positive. 
D)  equal to the stock price minus the exercise price. 
E)  None of the options are correct.

Question 15

Vega 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. 
E)  the sensitivity of an option's price to changes in volatility. 
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. 
E)  the sensitivity of an option's price to changes in volatility.

Question 16

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

Question 17

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 18

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

Question 19

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 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

Delta neutral

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?

Use the two-state put-option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______.

Volatility risk is

The elasticity of a stock call option is always

Prior to expiration,

Options sellers who are delta-hedging would most likely

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is −0.30, and the stock is currently selling for $46, what is the elasticity of the put?

In volatile markets, dynamic hedging may be difficult to implement because

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

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?

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

A call option was purchased last month for $2.50 with an exercise price of $45. The option is exercised when the market price of the stock is $48. What is the net profit or loss to the investor?

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

Vega is defined as

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

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

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

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

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Use the two-state put-option value in this problem. S_O = $100; X = $120; the two possibilities for S_T are $150 and $80. The range of P across the two states is _, and the hedge ratio is ___.

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