Question 1

Repricing an employee stock option involves which one of the following?

Accepted Answer

A) stock split 
B) stock dividend 
C) change in option strike price 
D) change in option expiration date 
E) change in option premium 
A) stock split 
B) stock dividend 
C) change in option strike price 
D) change in option expiration date 
E) change in option premium

Question 2

Which one of the following statements concerning option prices is correct?

Accepted Answer

A) There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices. 
B) Call option prices decrease and put option prices increase as the time to expiration increases. 
C) Put option prices are directly related to the price of the underlying stock. 
D) The relationship between option prices and stock prices is a linear relationship. 
E) Delta measures the effect that the underlying stock's dividend yield has on option prices. 
A) There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices. 
B) Call option prices decrease and put option prices increase as the time to expiration increases. 
C) Put option prices are directly related to the price of the underlying stock. 
D) The relationship between option prices and stock prices is a linear relationship. 
E) Delta measures the effect that the underlying stock's dividend yield has on option prices.

Question 3

A 6-month call option on ABC stock is priced at $2.80. The call option delta is .66. How will the approximate call option price be computed if the underlying stock price increases by $1?

Accepted Answer

A) $2.80 
B) $2.80 − $.66 
C) $2.80 + $.66 
D) $2.80 × .66 
E) $2.80 × (1 + .66) 
A) $2.80 
B) $2.80 − $.66 
C) $2.80 + $.66 
D) $2.80 × .66 
E) $2.80 × (1 + .66)

Question 4

What is the put option premium given the following information?
$\begin{array}{lr}
\text { Time (years) } & .5 \
\text { Strike price } & \$ 35.00 \
\text { Stock price } & \$ 33.00 \
\text { Risk-free rate } & 2.20\% \
\text { Volatility } & 35\%
\end{array}$

Accepted Answer

A) $1.58 
B) $2.01 
C) $2.59 
D) $3.96 
E) $4.20 
A) $1.58 
B) $2.01 
C) $2.59 
D) $3.96 
E) $4.20

Question 5

A stock is currently priced at $25 a share while the $28 put option is priced at $4.39. The put option delta is −.25. What is the approximate put price if the stock increases in value to $26? rev: 04_22_2020_QC_CS-209300

Accepted Answer

A) $3.94 
B) $4.14 
C) $4.39 
D) $4.45 
E) $4.50 
A) $3.94 
B) $4.14 
C) $4.39 
D) $4.45 
E) $4.50

Question 6

Which of the following are typical characteristics of an employee stock option?
I. originally issued with 10-year life
II. right to purchase stock at a designated price
III. exchange-traded
IV. vesting period

Accepted Answer

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

Question 7

Which one of the following is defined as an estimate of stock price volatility obtained from an option price?

Accepted Answer

A) calculated alpha 
B) estimated variance 
C) implied theta 
D) VIX 
E) implied standard deviation 
A) calculated alpha 
B) estimated variance 
C) implied theta 
D) VIX 
E) implied standard deviation

Question 8

You have been granted stock options on 300 shares of your employer's stock. The stock is currently selling for $37.80 and has a standard deviation of 30%. The option's strike price is $35 and the time to maturity is 10 years. What is the value of each option given a risk-free rate of 3.0%? Assume that no dividends are paid.

Accepted Answer

A) $12.95 
B) $14.47 
C) $16.68 
D) $18.39 
E) $20.01 
A) $12.95 
B) $14.47 
C) $16.68 
D) $18.39 
E) $20.01

Question 9

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?

Accepted Answer

A) volatility of the underlying stock price 
B) risk-free interest rate 
C) underlying stock price 
D) option strike price 
E) time to maturity 
A) volatility of the underlying stock price 
B) risk-free interest rate 
C) underlying stock price 
D) option strike price 
E) time to maturity

Question 10

Which one of the following inputs for the Black-Scholes model is not directly observable?

Accepted Answer

A) time to option maturity 
B) risk-free interest rate 
C) stock price 
D) strike price 
E) stock price volatility 
A) time to option maturity 
B) risk-free interest rate 
C) stock price 
D) strike price 
E) stock price volatility

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) $15 strike price; 45 days to option expiration 
B) $15 strike price; 60 days to option expiration 
C) $20 strike price; 45 days to option expiration 
D) $20 strike price; 60 days to option expiration 
E) Insufficient information is provided to answer this question. 
A) $15 strike price; 45 days to option expiration 
B) $15 strike price; 60 days to option expiration 
C) $20 strike price; 45 days to option expiration 
D) $20 strike price; 60 days to option expiration 
E) Insufficient information is provided to answer this question.

Question 12

Which one of the following is an argument against repricing employee stock options?

Accepted Answer

A) ESO's are originally issued with positive intrinsic value so there is no reason to reprice. 
B) Employees have more incentive when options are "under water". 
C) Repricing is a reward for failure. 
D) It is unnecessary to reprice as ESOs expire quickly. 
E) Repricing affects the market price of the firm's stock for all shareholders. 
A) ESO's are originally issued with positive intrinsic value so there is no reason to reprice. 
B) Employees have more incentive when options are "under water". 
C) Repricing is a reward for failure. 
D) It is unnecessary to reprice as ESOs expire quickly. 
E) Repricing affects the market price of the firm's stock for all shareholders.

Question 13

Which one of the following best describes the graphical relationship between stock prices and option prices?

Accepted Answer

A) linearity 
B) concavity 
C) convexity 
D) hyperbolic 
E) exponential 
A) linearity 
B) concavity 
C) convexity 
D) hyperbolic 
E) exponential

Question 14

A stock with a current price of $22 will either move up to $32.00 or down to $15 over the next period. The risk-free rate of interest is 1.1%. What is the value of a call option with a strike price of $25?

Accepted Answer

A) $2.20 
B) $2.34 
C) $2.67 
D) $2.79 
E) $2.41 
A) $2.20 
B) $2.34 
C) $2.67 
D) $2.79 
E) $2.41

Question 15

Which one of the following is another term for implied volatility?

Accepted Answer

A) implied delta 
B) implied standard deviation 
C) implied alpha 
D) implied beta 
E) implied gamma 
A) implied delta 
B) implied standard deviation 
C) implied alpha 
D) implied beta 
E) implied gamma

Question 16

A stock with a current price of $43 will either move up by a factor of 1.20 or down by a factor of .80 each period over the next two periods. The risk-free rate of interest is 3%. What is the current value of a call option with a strike price of $45?

Accepted Answer

A) $4.38 
B) $4.55 
C) $4.72 
D) $5.16 
E) $5.27 
A) $4.38 
B) $4.55 
C) $4.72 
D) $5.16 
E) $5.27

Question 17

You own 4,800 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 .955. 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 50 option contracts 
B) buy 503 option contracts 
C) write 50 option contracts 
D) write 503 option contracts 
E) write 5,026 option contracts 
A) buy 50 option contracts 
B) buy 503 option contracts 
C) write 50 option contracts 
D) write 503 option contracts 
E) write 5,026 option contracts

Question 18

VXN 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 19

You own 5,000 shares of Miller stock, which is currently, valued at $37 a share. The $40 put has a premium of $2.30 and a put delta of −.25. What position should you take in $40 put contracts to hedge your stock against a $1 decrease in price?

Accepted Answer

A) buy 200 contracts 
B) buy 1,200 contracts 
C) buy 20,000 contracts 
D) write 200 contracts 
E) write 1,200 contracts 
A) buy 200 contracts 
B) buy 1,200 contracts 
C) buy 20,000 contracts 
D) write 200 contracts 
E) write 1,200 contracts

Question 20

The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the ________.

Accepted Answer

A) VIX; VXO 
B) VIX; VXN 
C) VXO; VIX 
D) VXO; VXN 
E) VXN; VIX 
A) VIX; VXO 
B) VIX; VXN 
C) VXO; VIX 
D) VXO; VXN 
E) VXN; VIX

Repricing an employee stock option involves which one of the following?

Which one of the following statements concerning option prices is correct?

A 6-month call option on ABC stock is priced at $2.80. The call option delta is .66. How will the approximate call option price be computed if the underlying stock price increases by $1?

What is the put option premium given the following information? Time (years) .5 Strike price \ 35.00 Stock price \ 33.00 Risk-free rate 2.20\% Volatility 35\%

A stock is currently priced at $25 a share while the $28 put option is priced at $4.39. The put option delta is −.25. What is the approximate put price if the stock increases in value to $26? rev: 04_22_2020_QC_CS-209300

Which of the following are typical characteristics of an employee stock option? I. originally issued with 10-year life II. right to purchase stock at a designated price III. exchange-traded IV. vesting period

Which one of the following is defined as an estimate of stock price volatility obtained from an option price?

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?

Which one of the following inputs for the Black-Scholes model is not directly observable?

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

Which one of the following is an argument against repricing employee stock options?

Which one of the following best describes the graphical relationship between stock prices and option prices?

A stock with a current price of $22 will either move up to $32.00 or down to $15 over the next period. The risk-free rate of interest is 1.1%. What is the value of a call option with a strike price of $25?

Which one of the following is another term for implied volatility?

A stock with a current price of $43 will either move up by a factor of 1.20 or down by a factor of .80 each period over the next two periods. The risk-free rate of interest is 3%. What is the current value of a call option with a strike price of $45?

You own 4,800 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 .955. How many $30 call option contracts do you need to hedge against a −$1 change in the price of the stock?

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

You own 5,000 shares of Miller stock, which is currently, valued at $37 a share. The $40 put has a premium of $2.30 and a put delta of −.25. What position should you take in $40 put contracts to hedge your stock against a $1 decrease in price?

The S&P 500 volatility index is the while the NASDAQ 100 volatility index is the .

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

Repricing an employee stock option involves which one of the following?

Which one of the following statements concerning option prices is correct?

A 6-month call option on ABC stock is priced at $2.80. The call option delta is .66. How will the approximate call option price be computed if the underlying stock price increases by $1?

What is the put option premium given the following information? Time (years) .5 Strike price \ 35.00 Stock price \ 33.00 Risk-free rate 2.20\% Volatility 35\%

A stock is currently priced at $25 a share while the $28 put option is priced at $4.39. The put option delta is −.25. What is the approximate put price if the stock increases in value to $26? rev: 04_22_2020_QC_CS-209300

Which of the following are typical characteristics of an employee stock option? I. originally issued with 10-year life II. right to purchase stock at a designated price III. exchange-traded IV. vesting period

Which one of the following is defined as an estimate of stock price volatility obtained from an option price?

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?

Which one of the following inputs for the Black-Scholes model is not directly observable?

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

Which one of the following is an argument against repricing employee stock options?

Which one of the following best describes the graphical relationship between stock prices and option prices?

A stock with a current price of $22 will either move up to $32.00 or down to $15 over the next period. The risk-free rate of interest is 1.1%. What is the value of a call option with a strike price of $25?

Which one of the following is another term for implied volatility?

A stock with a current price of $43 will either move up by a factor of 1.20 or down by a factor of .80 each period over the next two periods. The risk-free rate of interest is 3%. What is the current value of a call option with a strike price of $45?

You own 4,800 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 .955. How many $30 call option contracts do you need to hedge against a −$1 change in the price of the stock?

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

You own 5,000 shares of Miller stock, which is currently, valued at $37 a share. The $40 put has a premium of $2.30 and a put delta of −.25. What position should you take in $40 put contracts to hedge your stock against a $1 decrease in price?

The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the ________.

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

The S&P 500 volatility index is the while the NASDAQ 100 volatility index is the .