Question 1

An American call-option buyer on a nondividend-paying stock will

Accepted Answer

A)  always exercise the call as soon as it is in the money. 
B)  only exercise the call when the stock price exceeds the previous high. 
C)  never exercise the call early. 
D)  buy an offsetting put whenever the stock price drops below the strike price. 
E)  None of the options are correct. 
A)  always exercise the call as soon as it is in the money. 
B)  only exercise the call when the stock price exceeds the previous high. 
C)  never exercise the call early. 
D)  buy an offsetting put whenever the stock price drops below the strike price. 
E)  None of the options are correct.

Question 2

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

Accepted Answer

A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The stock price, time to expiration, and stock volatility 
A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The stock price, time to expiration, and stock volatility

Question 3

A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, 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)  −$345 
B)  +$500 
C)  −$580 
D)  −$520 
A)  −$345 
B)  +$500 
C)  −$580 
D)  −$520

Question 4

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 5

The price of a stock is currently $50. Over the course of the next year, the price is anticipated to rise to $55 or decline to $46. If both outcomes are equally likely and the risk free interest rate is 3%, what is the price of a one year call option with an exercise price of $50 using the binomial model?

Accepted Answer

A)  $2.43 
B)  $2.50 
C)  $2.66 
D)  $2.70 
A)  $2.43 
B)  $2.50 
C)  $2.66 
D)  $2.70

Question 6

Which one of the following variables influences the value of put options?I) Level of interest ratesII) Time to expiration of the optionIII) Dividend yield of underlying stockIV) Stock price volatility

Accepted Answer

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

Question 7

The intrinsic value of an in-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. 
E)  None of the options are correct. 
A)  the stock price minus the exercise price. 
B)  the put premium. 
C)  zero. 
D)  the exercise price minus the stock price. 
E)  None of the options are correct.

Question 8

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 $14. What is the time value of the call?

Accepted Answer

A)  $8 
B)  $14 
C)  $0 
D)  $6 
E)  Cannot be determined without more information 
A)  $8 
B)  $14 
C)  $0 
D)  $6 
E)  Cannot be determined without more information

Question 9

The price of a stock is currently $37. Over the course of the next year, the price is anticipated to rise to $40 or decline to $36. If the upside has a 65% probability of occurring and the risk free interest rate is 3%, what is the price of a one year call option with an exercise price of $35 using the binomial model?

Accepted Answer

A)  $1.43 
B)  $1.50 
C)  $1.26 
D)  $2.70 
A)  $1.43 
B)  $1.50 
C)  $1.26 
D)  $2.70

Question 10

Empirical tests of the Black-Scholes option pricing model

Accepted Answer

A)  show that the model generates values fairly close to the prices at which options trade. 
B)  show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls. 
C)  indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
D)  show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
E)  All of the options are correct. 
A)  show that the model generates values fairly close to the prices at which options trade. 
B)  show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls. 
C)  indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
D)  show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
E)  All of the options are correct.

Question 11

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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Question 12

A hedge ratio for a call is always

Accepted Answer

A)  equal to one. 
B)  greater than one. 
C)  between zero and one. 
D)  between negative one and zero. 
E)  of no restricted value. 
A)  equal to one. 
B)  greater than one. 
C)  between zero and one. 
D)  between negative one and zero. 
E)  of no restricted value.

Question 13

Dynamic hedging 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 14

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. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that

Accepted Answer

A)  the call price would increase. 
B)  the call price would decrease. 
C)  the call price would not change. 
D)  the put price would decrease. 
E)  the put price would not change. 
A)  the call price would increase. 
B)  the call price would decrease. 
C)  the call price would not change. 
D)  the put price would decrease. 
E)  the put price would not change.

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

Question 16

Prior to expiration,

Accepted Answer

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

Question 17

The hedge ratio of an at-the-money call option on KO is 0.2. The hedge ratio of an at-the-money put option is −0.3. What is the hedge ratio of an at-the-money straddle position on KO?

Accepted Answer

A)  0.1 
B)  −0.3 
C)  −0.1 
D)  0.2 
A)  0.1 
B)  −0.3 
C)  −0.1 
D)  0.2

Question 18

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. 
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 19

A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, 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)  −$850 
C)  −$580 
D)  −$520 
A)  +$700 
B)  −$850 
C)  −$580 
D)  −$520

Question 20

At 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.

Exam 21: Option Valuation

An American call-option buyer on a nondividend-paying stock will

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

The gamma of an option is

Which one of the following variables influences the value of put options?I) Level of interest ratesII) Time to expiration of the optionIII) Dividend yield of underlying stockIV) Stock price volatility

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

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 $14. What is the time value of the call?

Empirical tests of the Black-Scholes option pricing model

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

A hedge ratio for a call is always

Dynamic hedging is

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. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that

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.

Prior to expiration,

The hedge ratio of an at-the-money call option on KO is 0.2. The hedge ratio of an at-the-money put option is −0.3. What is the hedge ratio of an at-the-money straddle position on KO?

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

A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

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

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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.