Question 1

To compute the value of a put using the Black-Scholes option pricing model, you:

Accepted Answer

A)  assume the equivalent call is worthless and then apply the put-call parity formula. 
B)  have to compute the value of the put as if it is a call and then apply the put-call parity formula. 
C)  subtract the value of an equivalent call from 1.0. 
D)  subtract the value of an equivalent call from the market price of the stock. 
E)  multiply the value of an equivalent call by e−ʳᵗ. 
A)  assume the equivalent call is worthless and then apply the put-call parity formula. 
B)  have to compute the value of the put as if it is a call and then apply the put-call parity formula. 
C)  subtract the value of an equivalent call from 1.0. 
D)  subtract the value of an equivalent call from the market price of the stock. 
E)  multiply the value of an equivalent call by e−ʳᵗ.

Question 2

Grocery Express stock is selling for $22 a share. A three-month, $20 call on this stock is priced at $2.85. Risk-free assets are currently returning .2 percent per month. What is the price of a three-month put on Grocery Express stock with a strike price of $20?

Accepted Answer

A)  $.37 
B)  $.73 
C)  $.87 
D)  $1.10 
E)  $1.18 
A)  $.37 
B)  $.73 
C)  $.87 
D)  $1.10 
E)  $1.18

Question 3

Todd invested $12,000 in an account today at 4.5 percent, compounded continuously. What will this investment be worth in 15 years?

Accepted Answer

A)  $26,203 
B)  $25,845 
C)  $24,287 
D)  $25,941 
E)  $23,568 
A)  $26,203 
B)  $25,845 
C)  $24,287 
D)  $25,941 
E)  $23,568

Question 4

Which one of the following statements is correct?

Accepted Answer

A)  Increasing the time to maturity may not increase the value of a European put. 
B)  An increase in time decreases the value of a call option. 
C)  Exercising an American option is always more valuable than selling the option. 
D)  Call options tend to be less sensitive to the passage of time than are put options. 
E)  Vega measures the sensitivity of an option's value to the passage of time. 
A)  Increasing the time to maturity may not increase the value of a European put. 
B)  An increase in time decreases the value of a call option. 
C)  Exercising an American option is always more valuable than selling the option. 
D)  Call options tend to be less sensitive to the passage of time than are put options. 
E)  Vega measures the sensitivity of an option's value to the passage of time.

Question 5

The value of a call option delta is best defined as a value that is:

Accepted Answer

A)  between zero and one. 
B)  less than zero. 
C)  greater than zero. 
D)  greater than or equal to zero. 
E)  less than or equal to zero. 
A)  between zero and one. 
B)  less than zero. 
C)  greater than zero. 
D)  greater than or equal to zero. 
E)  less than or equal to zero.

Question 6

Which one of the following provides the option of selling a stock at a specified price on a stated date even if the market price of the stock declines to zero?

Accepted Answer

A)  American call 
B)  European call 
C)  American put 
D)  European put 
E)  Either an American or European put 
A)  American call 
B)  European call 
C)  American put 
D)  European put 
E)  Either an American or European put

Question 7

Given a small change in the value of the underlying stock, the change in an option's price is approximately equal to the change in stock value:

Accepted Answer

A)  divided by delta. 
B)  divided by (1 − Delta). 
C)  divided by (1 + Delta). 
D)  multiplied by (1 − Delta). 
E)  multiplied by delta. 
A)  divided by delta. 
B)  divided by (1 − Delta). 
C)  divided by (1 + Delta). 
D)  multiplied by (1 − Delta). 
E)  multiplied by delta.

Question 8

Which one of the following statements is correct?

Accepted Answer

A)  The price of an American put is equal to the stock price minus the exercise price. 
B)  The value of a European call is greater than the value of a comparable American call. 
C)  The value of a put is equal to one minus the value of an equivalent call. 
D)  The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price. 
E)  The value of an American put will equal or exceed the value of a comparable European put. 
A)  The price of an American put is equal to the stock price minus the exercise price. 
B)  The value of a European call is greater than the value of a comparable American call. 
C)  The value of a put is equal to one minus the value of an equivalent call. 
D)  The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price. 
E)  The value of an American put will equal or exceed the value of a comparable European put.

Question 9

The stock of EHI has a current market value of $21.50 a share. The 3-month call with a strike price of $20 is selling for $2.07 while the 3-month put with a strike price of $20 is priced at $.41. What is the continuously compounded risk-free rate of return?

Accepted Answer

A)  2.9 percent 
B)  3.0 percent 
C)  4.1 percent 
D)  3.7  percent 
E)  3.2 percent 
A)  2.9 percent 
B)  3.0 percent 
C)  4.1 percent 
D)  3.7  percent 
E)  3.2 percent

Question 10

In the Black-Scholes option pricing model, the symbol "σ" is used to represent the standard deviation of the:

Accepted Answer

A)  option premium on a call with a specified exercise price. 
B)  rate of return on the underlying asset. 
C)  volatility of the risk-free rate of return. 
D)  rate of return on a risk-free asset. 
E)  option premium on a put with a specified exercise price. 
A)  option premium on a call with a specified exercise price. 
B)  rate of return on the underlying asset. 
C)  volatility of the risk-free rate of return. 
D)  rate of return on a risk-free asset. 
E)  option premium on a put with a specified exercise price.

Question 11

Today, Ted purchased 500 shares of ABC stock at a price of $42.20 per share. He also purchased five put option contracts on ABC at a price of $.10 per share, an exercise price of $40 and a 1-year term. What is the maximum loss Ted can realize on his investments over the next year?

Accepted Answer

A)  −$1,105 
B)  −$1,050 
C)  −$1,115 
D)  −$1,150 
E)  $0 
A)  −$1,105 
B)  −$1,050 
C)  −$1,115 
D)  −$1,150 
E)  $0

Question 12

A stock is currently priced at $38. A call option with an expiration of one year has an exercise price of $40. The risk-free rate is 4.2 percent per year, compounded continuously, and the standard deviation of the stock's return is infinitely large. What is the price of the call option?

Accepted Answer

A)  $2.47 
B)  $34.80 
C)  $38.00 
D)  $5.63 
E)  $40.00 
A)  $2.47 
B)  $34.80 
C)  $38.00 
D)  $5.63 
E)  $40.00

Question 13

Assume all stocks are non-dividend paying. Given this assumption, which one of these statements is correct regarding stock options?

Accepted Answer

A)  European put options are more valuable than comparable American put options. 
B)  Exercising a well-into-the-money American put option is generally not a good idea. 
C)  It is never optimal to exercise an American call option early. 
D)  You should wait to exercise a put option if the stock price falls to zero. 
E)  You are better off exercising an in-the-money call option than selling it. 
A)  European put options are more valuable than comparable American put options. 
B)  Exercising a well-into-the-money American put option is generally not a good idea. 
C)  It is never optimal to exercise an American call option early. 
D)  You should wait to exercise a put option if the stock price falls to zero. 
E)  You are better off exercising an in-the-money call option than selling it.

Question 14

The delta of a call option on a firm's assets is .408. By how much will a $220,000 project increase the value of equity?

Accepted Answer

A)  $89,760 
B)  $71,622 
C)  $309,760 
D)  $130,240 
E)  $539,216 
A)  $89,760 
B)  $71,622 
C)  $309,760 
D)  $130,240 
E)  $539,216

Question 15

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

Accepted Answer

A)  Theta 
B)  Vega 
C)  Rho 
D)  Delta 
E)  Gamma 
A)  Theta 
B)  Vega 
C)  Rho 
D)  Delta 
E)  Gamma

Question 16

You need $15,400 in three years. How much do you need to deposit today to fund this need if you can earn 5 percent per year, compounded continuously? Assume this is the only deposit you make.

Accepted Answer

A)  $13,506 
B)  $13,049 
C)  $14,179 
D)  $13,255 
E)  $12,916 
A)  $13,506 
B)  $13,049 
C)  $14,179 
D)  $13,255 
E)  $12,916

Question 17

A stock is currently selling for $34 a share. The risk-free rate is 3.1 percent and the standard deviation is 33 percent. What is the value of d₁ of a 3-month call option with a strike price of $35?

Accepted Answer

A)  −.01872 
B)  −.04621 
C)  −.05047 
D)  −.02950 
E)  −.20356 
A)  −.01872 
B)  −.04621 
C)  −.05047 
D)  −.02950 
E)  −.20356

Question 18

Theta measures an option's:

Accepted Answer

A)  intrinsic value. 
B)  volatility. 
C)  rate of time decay. 
D)  sensitivity to changes in the value of the underlying asset. 
E)  sensitivity to changes in the risk-free rate. 
A)  intrinsic value. 
B)  volatility. 
C)  rate of time decay. 
D)  sensitivity to changes in the value of the underlying asset. 
E)  sensitivity to changes in the risk-free rate.

Exam 25: Option Valuation

To compute the value of a put using the Black-Scholes option pricing model, you:

Grocery Express stock is selling for $22 a share. A three-month, $20 call on this stock is priced at $2.85. Risk-free assets are currently returning .2 percent per month. What is the price of a three-month put on Grocery Express stock with a strike price of $20?

Todd invested $12,000 in an account today at 4.5 percent, compounded continuously. What will this investment be worth in 15 years?

Which one of the following statements is correct?

The value of a call option delta is best defined as a value that is:

Which one of the following provides the option of selling a stock at a specified price on a stated date even if the market price of the stock declines to zero?

Given a small change in the value of the underlying stock, the change in an option's price is approximately equal to the change in stock value:

Which one of the following statements is correct?

The stock of EHI has a current market value of $21.50 a share. The 3-month call with a strike price of $20 is selling for $2.07 while the 3-month put with a strike price of $20 is priced at $.41. What is the continuously compounded risk-free rate of return?

In the Black-Scholes option pricing model, the symbol "σ" is used to represent the standard deviation of the:

Today, Ted purchased 500 shares of ABC stock at a price of $42.20 per share. He also purchased five put option contracts on ABC at a price of $.10 per share, an exercise price of $40 and a 1-year term. What is the maximum loss Ted can realize on his investments over the next year?

A stock is currently priced at $38. A call option with an expiration of one year has an exercise price of $40. The risk-free rate is 4.2 percent per year, compounded continuously, and the standard deviation of the stock's return is infinitely large. What is the price of the call option?

Assume all stocks are non-dividend paying. Given this assumption, which one of these statements is correct regarding stock options?

The delta of a call option on a firm's assets is .408. By how much will a $220,000 project increase the value of equity?

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

You need $15,400 in three years. How much do you need to deposit today to fund this need if you can earn 5 percent per year, compounded continuously? Assume this is the only deposit you make.

A stock is currently selling for $34 a share. The risk-free rate is 3.1 percent and the standard deviation is 33 percent. What is the value of d₁ of a 3-month call option with a strike price of $35?

Theta measures an option's:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Mergers and Acquisitions

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