Question 1

All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50?

Accepted Answer

A) $25 stock price; 15% standard deviation 
B) $25 stock price; 30% standard deviation 
C) $30 stock price; 15% standard deviation 
D) $30 stock price; 30% standard deviation 
E) Insufficient information is provided to answer this question. 
A) $25 stock price; 15% standard deviation 
B) $25 stock price; 30% standard deviation 
C) $30 stock price; 15% standard deviation 
D) $30 stock price; 30% standard deviation 
E) Insufficient information is provided to answer this question.

Question 2

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Accepted Answer

A) weekly 
B) annually 
C) just prior to the fiscal year end 
D) at option expiration 
E) only when the options are in the money 
A) weekly 
B) annually 
C) just prior to the fiscal year end 
D) at option expiration 
E) only when the options are in the money

Question 3

Which one of the following statements is correct?

Accepted Answer

A) Both call and put option deltas are always positive. 
B) Put option deltas are always positive. 
C) Call option deltas are always positive. 
D) Both call and put option deltas are always negative. 
E) All deltas can be positive, negative, or equal to zero. 
A) Both call and put option deltas are always positive. 
B) Put option deltas are always positive. 
C) Call option deltas are always positive. 
D) Both call and put option deltas are always negative. 
E) All deltas can be positive, negative, or equal to zero.

Question 4

A stock with a current price of $32 will either move up to $40.00 or down to $30 over the next period. The risk-free rate of interest is 2.3%. What is the value of a call option with a strike price of $33?

Accepted Answer

A) $1.30 
B) $1.44 
C) $1.87 
D) $2.09 
E) $2.41 
A) $1.30 
B) $1.44 
C) $1.87 
D) $2.09 
E) $2.41

Question 5

A stock with a current price of $40 will either move up to $41 or down to $39 over the next period. The risk-free rate of interest is 2.45%. What is the value of a call option with a strike price of $40?

Accepted Answer

A) $.49 
B) $.68 
C) $.86 
D) $.97 
E) $1.21 
A) $.49 
B) $.68 
C) $.86 
D) $.97 
E) $1.21

Question 6

You own 3,550 shares of a stock that is currently priced at $34 a share. Given this price, the option delta for a $30 call option on this stock is .923. How many $30 call option contracts do you need to hedge against a −$1 change in the price of the stock?

Accepted Answer

A) buy 4 option contracts 
B) buy 38 option contracts 
C) write 4 option contracts 
D) write 38 option contracts 
E) write 385 option contracts 
A) buy 4 option contracts 
B) buy 38 option contracts 
C) write 4 option contracts 
D) write 38 option contracts 
E) write 385 option contracts

Question 7

VXO is an implied volatility calculated from options on which one of the following?

Accepted Answer

A) Wilshire 3000 index 
B) DJIA 
C) S&P 500 index 
D) S&P 100 index 
E) NASDAQ 100 index 
A) Wilshire 3000 index 
B) DJIA 
C) S&P 500 index 
D) S&P 100 index 
E) NASDAQ 100 index

Question 8

Stock prices and call option prices are:

Accepted Answer

A) unrelated. 
B) negatively correlated. 
C) directly related. 
D) perfectly related. 
E) inversely related. 
A) unrelated. 
B) negatively correlated. 
C) directly related. 
D) perfectly related. 
E) inversely related.

Question 9

What is the call option premium given the following information?
$\begin{array}{lc}
\text { Stock price } & \$50 \
\text { Call strike price } & \$ 45\
\text { Volatility (std dev) } & 15\% \
\text { Time (years) } & .25 \
\text { Risk-free rate } & 2.00\% \
\text { Dividend yield } & 0\%
\end{array}$

Accepted Answer

A) $4.86 
B) $5.04 
C) $5.16 
D) $5.34 
E) $5.50 
A) $4.86 
B) $5.04 
C) $5.16 
D) $5.34 
E) $5.50

Question 10

A stock is currently priced at $22 a share while the $26 put option is priced at $5.22. The put option delta is −.25. What is the approximate put price if the stock increases in value to $25?

Accepted Answer

A) $3.76 
B) $4.47 
C) $5.08 
D) $5.27 
E) $5.50 
A) $3.76 
B) $4.47 
C) $5.08 
D) $5.27 
E) $5.50

Question 11

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

Accepted Answer

A) $30 stock price; 20% standard deviation 
B) $30 stock price; 25% standard deviation 
C) $35 stock price; 20% standard deviation 
D) $35 stock price; 25% standard deviation 
E) Insufficient information is provided to answer this question. 
A) $30 stock price; 20% standard deviation 
B) $30 stock price; 25% standard deviation 
C) $35 stock price; 20% standard deviation 
D) $35 stock price; 25% standard deviation 
E) Insufficient information is provided to answer this question.

Question 12

You have determined that you need −1,793 call options to hedge your stock portfolio. What should you do based on this information?

Accepted Answer

A) buy 17 call option contracts 
B) buy 1,793 call option contracts 
C) write 17 call option contracts 
D) write 18 call option contracts 
E) write 1,793 call option contracts 
A) buy 17 call option contracts 
B) buy 1,793 call option contracts 
C) write 17 call option contracts 
D) write 18 call option contracts 
E) write 1,793 call option contracts

Question 13

Given a set of variables, the Black-Scholes option pricing formula has a call option delta of .496. What is the put delta given these same variables?

Accepted Answer

A) −1.496 
B) −.504 
C) .496 
D) .504 
E) 1.496 
A) −1.496 
B) −.504 
C) .496 
D) .504 
E) 1.496

Question 14

You have an equity portfolio valued at $1.22 million that has a beta of .98. You have decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 3,092. The option delta is .639. How many option contracts must you write to effectively hedge your portfolio?

Accepted Answer

A) 4 contracts 
B) 6 contracts 
C) 8 contracts 
D) 10 contracts 
E) 20 contracts 
A) 4 contracts 
B) 6 contracts 
C) 8 contracts 
D) 10 contracts 
E) 20 contracts

Question 15

What is the put option premium given the following information?
$$\begin{array} { l l } 
\text { Stack price } & \$ 26 \
\text { Strike price } & \$ 30 \
\text { Standard deviation } &35\%\
\text { Rigk-free rate }&1.3\% \
\text { Dividend yield } &0\%\
\text { Time (years) }&.25
\end{array}$$

Accepted Answer

A) $3.62 
B) $4.27 
C) $4.49 
D) $4.69 
E) $5.08 
A) $3.62 
B) $4.27 
C) $4.49 
D) $4.69 
E) $5.08

Question 16

Which one of the following statements concerning the relationship between the volatility of the underlying stock price, as measured by sigma (σ), and call and put prices is correct?

Accepted Answer

A) Call and put prices react fairly similarly in response to changes in sigma. 
B) Call prices increase and put prices decrease as sigma increases. 
C) Put prices increase and call prices decrease as sigma increases. 
D) Call prices increase and put prices remain relatively constant as sigma increases. 
E) Neither put nor call prices are affected by changes in sigma. 
A) Call and put prices react fairly similarly in response to changes in sigma. 
B) Call prices increase and put prices decrease as sigma increases. 
C) Put prices increase and call prices decrease as sigma increases. 
D) Call prices increase and put prices remain relatively constant as sigma increases. 
E) Neither put nor call prices are affected by changes in sigma.

Question 17

A stock is currently priced at $44 a share while the $45 call option is priced at $1.22. The call option delta is .86. What is the approximate call price if the stock increases in value to $45?

Accepted Answer

A) $.12 
B) $.26 
C) $.96 
D) $1.98 
E) $2.08 
A) $.12 
B) $.26 
C) $.96 
D) $1.98 
E) $2.08

Question 18

What is the put option premium given the following information?
$\begin{array}{lr}
\text { Time (years) } & .25 \
\text { Strike price } & \$ 40.00 \
\text { Stock price } & \$ 37.00 \
\text { Risk-free rate } & 2.00\% \
\text { Volatility } & 30\%
\end{array}$

Accepted Answer

A) $1.58 
B) $2.01 
C) $2.59 
D) $3.96 
E) $4.15 
A) $1.58 
B) $2.01 
C) $2.59 
D) $3.96 
E) $4.15

Question 19

You own 1,800 shares of Textile stock, which is currently, valued at $62 a share. The $65 put has a premium of $4.26 and a put delta of −.60. What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?

Accepted Answer

A) buy 3 contracts 
B) buy 30 contracts 
C) buy 300 contracts 
D) write 3 contracts 
E) write 30 contracts 
A) buy 3 contracts 
B) buy 30 contracts 
C) buy 300 contracts 
D) write 3 contracts 
E) write 30 contracts

Question 20

Which two of the following are the key reasons why most major corporations issue employee stock options?
I. provide an employee benefit in place of a retirement plan
II. no immediate cost to the corporation
III. align management and shareholder interests
IV. replace employer-provided insurance benefits

Accepted Answer

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

All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50?

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Which one of the following statements is correct?

A stock with a current price of $32 will either move up to $40.00 or down to $30 over the next period. The risk-free rate of interest is 2.3%. What is the value of a call option with a strike price of $33?

A stock with a current price of $40 will either move up to $41 or down to $39 over the next period. The risk-free rate of interest is 2.45%. What is the value of a call option with a strike price of $40?

You own 3,550 shares of a stock that is currently priced at $34 a share. Given this price, the option delta for a $30 call option on this stock is .923. How many $30 call option contracts do you need to hedge against a −$1 change in the price of the stock?

VXO is an implied volatility calculated from options on which one of the following?

Stock prices and call option prices are:

What is the call option premium given the following information? Stock price \5 0 Call strike price \ 45 Volatility (std dev) 15\% Time (years) .25 Risk-free rate 2.00\% Dividend yield 0\%

A stock is currently priced at $22 a share while the $26 put option is priced at $5.22. The put option delta is −.25. What is the approximate put price if the stock increases in value to $25?

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

You have determined that you need −1,793 call options to hedge your stock portfolio. What should you do based on this information?

Given a set of variables, the Black-Scholes option pricing formula has a call option delta of .496. What is the put delta given these same variables?

You have an equity portfolio valued at $1.22 million that has a beta of .98. You have decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 3,092. The option delta is .639. How many option contracts must you write to effectively hedge your portfolio?

What is the put option premium given the following information? Stack price \ 26 Strike price \ 30 Standard deviation 35\% Rigk-free rate 1.3\% Dividend yield 0\% Time (years) .25

Which one of the following statements concerning the relationship between the volatility of the underlying stock price, as measured by sigma (σ), and call and put prices is correct?

A stock is currently priced at $44 a share while the $45 call option is priced at $1.22. The call option delta is .86. What is the approximate call price if the stock increases in value to $45?

What is the put option premium given the following information? Time (years) .25 Strike price \ 40.00 Stock price \ 37.00 Risk-free rate 2.00\% Volatility 30\%

You own 1,800 shares of Textile stock, which is currently, valued at $62 a share. The $65 put has a premium of $4.26 and a put delta of −.60. What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 16: Option Valuation

All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50?

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Which one of the following statements is correct?

A stock with a current price of $32 will either move up to $40.00 or down to $30 over the next period. The risk-free rate of interest is 2.3%. What is the value of a call option with a strike price of $33?

A stock with a current price of $40 will either move up to $41 or down to $39 over the next period. The risk-free rate of interest is 2.45%. What is the value of a call option with a strike price of $40?

You own 3,550 shares of a stock that is currently priced at $34 a share. Given this price, the option delta for a $30 call option on this stock is .923. How many $30 call option contracts do you need to hedge against a −$1 change in the price of the stock?

VXO is an implied volatility calculated from options on which one of the following?

Stock prices and call option prices are:

What is the call option premium given the following information? Stock price \5 0 Call strike price \ 45 Volatility (std dev) 15\% Time (years) .25 Risk-free rate 2.00\% Dividend yield 0\%

A stock is currently priced at $22 a share while the $26 put option is priced at $5.22. The put option delta is −.25. What is the approximate put price if the stock increases in value to $25?

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

You have determined that you need −1,793 call options to hedge your stock portfolio. What should you do based on this information?

Given a set of variables, the Black-Scholes option pricing formula has a call option delta of .496. What is the put delta given these same variables?

You have an equity portfolio valued at $1.22 million that has a beta of .98. You have decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 3,092. The option delta is .639. How many option contracts must you write to effectively hedge your portfolio?

What is the put option premium given the following information? Stack price \ 26 Strike price \ 30 Standard deviation 35\% Rigk-free rate 1.3\% Dividend yield 0\% Time (years) .25

Which one of the following statements concerning the relationship between the volatility of the underlying stock price, as measured by sigma (σ), and call and put prices is correct?

A stock is currently priced at $44 a share while the $45 call option is priced at $1.22. The call option delta is .86. What is the approximate call price if the stock increases in value to $45?

What is the put option premium given the following information? Time (years) .25 Strike price \ 40.00 Stock price \ 37.00 Risk-free rate 2.00\% Volatility 30\%

You own 1,800 shares of Textile stock, which is currently, valued at $62 a share. The $65 put has a premium of $4.26 and a put delta of −.60. What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters