Question 1

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

Question 2

Which one of the following variables is NOT included in the Black-Scholes option pricing model?

Accepted Answer

A) strike price 
B) time remaining until option expiration 
C) stock volatility as measured by standard deviation 
D) stock price 
E) market rate of return 
A) strike price 
B) time remaining until option expiration 
C) stock volatility as measured by standard deviation 
D) stock price 
E) market rate of return

Question 3

Lynn has an equity portfolio valued at $15 million that has a beta of 1.30. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,602. The option delta is .53. How many option contracts must Lynn write to effectively hedge her portfolio?

Accepted Answer

A) 137 contracts 
B) 142 contracts 
C) 175 contracts 
D) 191 contracts 
E) 230 contracts 
A) 137 contracts 
B) 142 contracts 
C) 175 contracts 
D) 191 contracts 
E) 230 contracts

Question 4

Which two of the following characteristics are key to making SPX options an easy choice as a hedge against an equity portfolio?
I. European style
II. American style
III. trade in whole or partial contracts
IV. cash settlement

Accepted Answer

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

Question 5

Which two of the following have the greatest effect on stock option prices?
I. volatility of underlying stock price
II. time to option maturity
III. underlying stock price
IV. option strike price

Accepted Answer

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

Question 6

What is the put option premium given the following information?
$\begin{array}{lrr}
  \text { Stock price } &\$28.00\
 \text { Strike price } &\$35.00\
 \text { Volatility } &50\%\
 \text {Dividend Yield  } &0\
 \text { Time (years) } &.50\
 \text { Risk-free Rate } &3.50\%\
\end{array}$

Accepted Answer

A) $7.49 
B) $7.98 
C) $8.28 
D) $8.76 
E) $9.64 
A) $7.49 
B) $7.98 
C) $8.28 
D) $8.76 
E) $9.64

Question 7

Given a set of variables, the Black-Scholes option pricing formula has a put option delta of −.392. What is the call delta given these same variables?

Accepted Answer

A) −1.154 
B) −.608 
C) .392 
D) .608 
E) 1.154 
A) −1.154 
B) −.608 
C) .392 
D) .608 
E) 1.154

Question 8

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

Accepted Answer

A) $20 strike price; 45 days to option expiration 
B) $20 strike price; 60 days to option expiration 
C) $25 strike price; 45 days to option expiration 
D) $25 strike price; 60 days to option expiration 
E) Insufficient information is provided to answer this question. 
A) $20 strike price; 45 days to option expiration 
B) $20 strike price; 60 days to option expiration 
C) $25 strike price; 45 days to option expiration 
D) $25 strike price; 60 days to option expiration 
E) Insufficient information is provided to answer this question.

Question 9

Employee stock options grant an employee which one of the following rights?

Accepted Answer

A) right to sell shares in an S&P 500 index fund 
B) right to buy shares in an S&P 500 index fund 
C) right to sell shares of the employer's stock 
D) right to buy shares of the employer's stock 
E) right to buy shares in the employer's retirement plan 
A) right to sell shares in an S&P 500 index fund 
B) right to buy shares in an S&P 500 index fund 
C) right to sell shares of the employer's stock 
D) right to buy shares of the employer's stock 
E) right to buy shares in the employer's retirement plan

Question 10

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?

Accepted Answer

A) Put and call prices increase at the same rate as the time to option maturity increases. 
B) Put prices and time to maturity are inversely related. 
C) Call prices tend to increase faster than put prices as the time to option maturity increases. 
D) Put prices increase while call prices remain constant as the time to option maturity increases. 
E) Call prices are inversely related to time to maturity. 
A) Put and call prices increase at the same rate as the time to option maturity increases. 
B) Put prices and time to maturity are inversely related. 
C) Call prices tend to increase faster than put prices as the time to option maturity increases. 
D) Put prices increase while call prices remain constant as the time to option maturity increases. 
E) Call prices are inversely related to time to maturity.

Question 11

An increase in which two of the following will have a negative effect on the value of a put option?
I. risk-free interest rate
II. time to option maturity
III. underlying stock price
IV. option strike price

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

Question 12

A stock with a current price of $37 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 4%. What is the current value of a call option with a strike price of $40?

Accepted Answer

A) $4.16 
B) $4.42 
C) $4.71 
D) $5.09 
E) $5.13 
A) $4.16 
B) $4.42 
C) $4.71 
D) $5.09 
E) $5.13

Question 13

What is the put option premium given the following information?
$\begin{array}{lrr}
  \text { Stock price } &\$17\
 \text { Strike price } &\$22\
 \text { Volatility } &25\%\
 \text {Dividend Yield  } &1.1\%\
 \text { Time (years) } &0\%\
 \text { Risk-free Rate } &.25\
\end{array}$

Accepted Answer

A) $3.98 
B) $4.32 
C) $4.59 
D) $4.96 
E) $5.18 
A) $3.98 
B) $4.32 
C) $4.59 
D) $4.96 
E) $5.18

Question 14

What is the call option premium given the following information?
$\begin{array}{lrr}
  \text { Stock price } &\$45.00\
 \text { Strike price } &\$40.00\
 \text { Volatility } &35\%\
 \text {Dividend Yield  } &0\
 \text { Time (years) } &.50\
 \text { Risk-free Rate } &3.50\%\
\end{array}$

Accepted Answer

A) $4.63 
B) $5.28 
C) $6.39 
D) $7.60 
E) $8.66 
A) $4.63 
B) $5.28 
C) $6.39 
D) $7.60 
E) $8.66

Question 15

All else constant, which one of the following situations will produce the highest call price given a strike price of $25?

Accepted Answer

A) $30 stock price; 40 days to option expiration 
B) $30 stock price; 60 days to option expiration 
C) $35 stock price; 40 days to option expiration 
D) $35 stock price; 60 days to option expiration 
E) Insufficient information is provided to answer this question. 
A) $30 stock price; 40 days to option expiration 
B) $30 stock price; 60 days to option expiration 
C) $35 stock price; 40 days to option expiration 
D) $35 stock price; 60 days to option expiration 
E) Insufficient information is provided to answer this question.

Question 16

Laura has an equity portfolio valued at $11.25 million that has a beta of 1.27. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,502. The option delta is .543. How many option contracts must Laura write to effectively hedge her portfolio?

Accepted Answer

A) 37 contracts 
B) 42 contracts 
C) 175 contracts 
D) 181 contracts 
E) 191 contracts 
A) 37 contracts 
B) 42 contracts 
C) 175 contracts 
D) 181 contracts 
E) 191 contracts

Question 17

Which of the following will result from a decrease in an option's strike price?
I. increase in call option price
II. decrease in call option price
III. increase in put option price
IV. decrease in put option price

Accepted Answer

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

Question 18

You own 1,300 shares of ABC stock that is currently priced at $36 a share. Given this price, the option delta for a $34 call option on this stock is .724. How many $34 call options do you need to hedge against a −$1 change in the price of the stock?

Accepted Answer

A) buy 1,570 options 
B) buy 2,072 options 
C) write 1,769 options 
D) write 2,072 options 
E) write 2,439 options 
A) buy 1,570 options 
B) buy 2,072 options 
C) write 1,769 options 
D) write 2,072 options 
E) write 2,439 options

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

Which one of the following variables is NOT included in the Black-Scholes option pricing model?

Lynn has an equity portfolio valued at $15 million that has a beta of 1.30. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,602. The option delta is .53. How many option contracts must Lynn write to effectively hedge her portfolio?

Which two of the following characteristics are key to making SPX options an easy choice as a hedge against an equity portfolio? I. European style II. American style III. trade in whole or partial contracts IV. cash settlement

Which two of the following have the greatest effect on stock option prices? I. volatility of underlying stock price II. time to option maturity III. underlying stock price IV. option strike price

What is the put option premium given the following information? Stock price \2 8.00 Strike price \3 5.00 Volatility 50\% Dividend Yield 0 Time (years) .50 Risk-free Rate 3.50\%

Given a set of variables, the Black-Scholes option pricing formula has a put option delta of −.392. What is the call delta given these same variables?

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

Employee stock options grant an employee which one of the following rights?

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?

An increase in which two of the following will have a negative effect on the value of a put option? I. risk-free interest rate II. time to option maturity III. underlying stock price IV. option strike price

A stock with a current price of $37 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 4%. What is the current value of a call option with a strike price of $40?

What is the put option premium given the following information? Stock price \1 7 Strike price \2 2 Volatility 25\% Dividend Yield 1.1\% Time (years) 0\% Risk-free Rate .25

What is the call option premium given the following information? Stock price \4 5.00 Strike price \4 0.00 Volatility 35\% Dividend Yield 0 Time (years) .50 Risk-free Rate 3.50\%

All else constant, which one of the following situations will produce the highest call price given a strike price of $25?

Laura has an equity portfolio valued at $11.25 million that has a beta of 1.27. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,502. The option delta is .543. How many option contracts must Laura write to effectively hedge her portfolio?

Which of the following will result from a decrease in an option's strike price? I. increase in call option price II. decrease in call option price III. increase in put option price IV. decrease in put option price

You own 1,300 shares of ABC stock that is currently priced at $36 a share. Given this price, the option delta for a $34 call option on this stock is .724. How many $34 call options do you need to hedge against a −$1 change in the price of the stock?

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

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

Which one of the following variables is NOT included in the Black-Scholes option pricing model?

Lynn has an equity portfolio valued at $15 million that has a beta of 1.30. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,602. The option delta is .53. How many option contracts must Lynn write to effectively hedge her portfolio?

Which two of the following characteristics are key to making SPX options an easy choice as a hedge against an equity portfolio? I. European style II. American style III. trade in whole or partial contracts IV. cash settlement

Which two of the following have the greatest effect on stock option prices? I. volatility of underlying stock price II. time to option maturity III. underlying stock price IV. option strike price

What is the put option premium given the following information? Stock price \2 8.00 Strike price \3 5.00 Volatility 50\% Dividend Yield 0 Time (years) .50 Risk-free Rate 3.50\%

Given a set of variables, the Black-Scholes option pricing formula has a put option delta of −.392. What is the call delta given these same variables?

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

Employee stock options grant an employee which one of the following rights?

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?

An increase in which two of the following will have a negative effect on the value of a put option? I. risk-free interest rate II. time to option maturity III. underlying stock price IV. option strike price

A stock with a current price of $37 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 4%. What is the current value of a call option with a strike price of $40?

What is the put option premium given the following information? Stock price \1 7 Strike price \2 2 Volatility 25\% Dividend Yield 1.1\% Time (years) 0\% Risk-free Rate .25

What is the call option premium given the following information? Stock price \4 5.00 Strike price \4 0.00 Volatility 35\% Dividend Yield 0 Time (years) .50 Risk-free Rate 3.50\%

All else constant, which one of the following situations will produce the highest call price given a strike price of $25?

Laura has an equity portfolio valued at $11.25 million that has a beta of 1.27. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1,502. The option delta is .543. How many option contracts must Laura write to effectively hedge her portfolio?

Which of the following will result from a decrease in an option's strike price? I. increase in call option price II. decrease in call option price III. increase in put option price IV. decrease in put option price

You own 1,300 shares of ABC stock that is currently priced at $36 a share. Given this price, the option delta for a $34 call option on this stock is .724. How many $34 call options do you need to hedge against a −$1 change in the price of the stock?

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