Question 1

A hedge ratio for a put is always

Accepted Answer

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

Question 2

Use the Black-Scholes option pricing model for the following problem.Given: SO = $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily).No dividends will be paid before option expires.The value of the call option is

Accepted Answer

A) $10.16. 
B) $5.16. 
C) $0.00. 
D) $2.16. 
A) $10.16. 
B) $5.16. 
C) $0.00. 
D) $2.16.

Question 3

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call

Accepted Answer

A) $8 
B) $12 
C) $6 
D) $4 
E) Cannot be determined without more information 
A) $8 
B) $12 
C) $6 
D) $4 
E) Cannot be determined without more information

Question 4

As the underlying stock's price increased, the call option valuation function's slope approaches

Accepted Answer

A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half times the value of the stock. 
E) infinity. 
A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half times the value of the stock. 
E) infinity.

Question 5

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. What is the intrinsic value of the call

Accepted Answer

A) $12 
B) $8 
C) $0 
D) $23 
A) $12 
B) $8 
C) $0 
D) $23

Question 6

Which one of the following variables influence the value of call options
I. Level of interest rates
II. Time to expiration of the option
III. Dividend yield of underlying stock
IV. 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

Options sellers who are delta-hedging would most likely

Accepted Answer

A) sell when markets are falling. 
B) buy when markets are rising. 
C) sell when markets are falling and buy when markets are rising. 
D) sell whether markets are falling or rising. 
E) buy whether markets are falling or rising. 
A) sell when markets are falling. 
B) buy when markets are rising. 
C) sell when markets are falling and buy when markets are rising. 
D) sell whether markets are falling or rising. 
E) buy whether markets are falling or rising.

Question 8

Discuss the relationship between option prices and time to expiration, volatility of the underlying stocks, and the exercise price.

Accepted Answer

The longer the time to expiration, the h

Question 9

A portfolio consists of 100 shares of stock and 1500 calls on that stock.If the hedge ratio for the call is 0.7, 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) +$500 
C) -$1,150 
D) -$520 
A) +$700 
B) +$500 
C) -$1,150 
D) -$520

Question 10

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 11

Volatility risk is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the risk incurred from unpredictable changes in volatility. 
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 risk incurred from unpredictable changes in volatility. 
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 12

Other things equal, the price of a stock call option is positively correlated with the following factors except

Accepted Answer

A) the stock price. 
B) the time to expiration. 
C) the stock volatility. 
D) the exercise price. 
A) the stock price. 
B) the time to expiration. 
C) the stock volatility. 
D) the exercise price.

Question 13

Other things equal, the price of a stock put option is positively correlated with the following factors except

Accepted Answer

A) the stock price. 
B) the time to expiration. 
C) the stock volatility. 
D) the exercise price. 
A) the stock price. 
B) the time to expiration. 
C) the stock volatility. 
D) the exercise price.

Question 14

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A) 0.70. 
B) 0.30. 
C) -0.70. 
D) -0.30. 
E) -.17. 
A) 0.70. 
B) 0.30. 
C) -0.70. 
D) -0.30. 
E) -.17.

Question 15

Before 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. 
E) None of the options 
A) equal to zero. 
B) equal to the stock price minus the exercise price. 
C) negative. 
D) positive. 
E) None of the options

Question 16

The time value of a call option is I) the difference between the option's price and the value it would have if it were expiring immediately.
II) the same as the present value of the option's expected future cash flows.
III) the difference between the option's price and its expected future value.
IV) different from the usual time value of money concept.

Accepted Answer

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

Question 17

Delta is defined as

Accepted Answer

A) the change in the value of an option for a dollar change in the price of the underlying asset. 
B) the change in the value of the underlying asset for a dollar change in the call price. 
C) the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D) the change in the volatility of the underlying stock price. 
E) None of the options 
A) the change in the value of an option for a dollar change in the price of the underlying asset. 
B) the change in the value of the underlying asset for a dollar change in the call price. 
C) the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D) the change in the volatility of the underlying stock price. 
E) None of the options

Question 18

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 19

Delta neutral

Accepted Answer

A) is the volatility level for the stock that the option price implies. 
B) is the continued updating of the hedge ratio as time passes. 
C) is the percentage change in the stock call option price divided by the percentage change in the stock price. 
D) means the portfolio has no tendency to change value as the underlying portfolio value changes. 
A) is the volatility level for the stock that the option price implies. 
B) is the continued updating of the hedge ratio as time passes. 
C) is the percentage change in the stock call option price divided by the percentage change in the stock price. 
D) means the portfolio has no tendency to change value as the underlying portfolio value changes.

Question 20

A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6, 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) +$500 
C) -$580 
D) -$520 
A) +$700 
B) +$500 
C) -$580 
D) -$520

Exam 21: Option Valuation

A hedge ratio for a put is always

Use the Black-Scholes option pricing model for the following problem.Given: SO = $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily).No dividends will be paid before option expires.The value of the call option is

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call

As the underlying stock's price increased, the call option valuation function's slope approaches

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. What is the intrinsic value of the call

Which one of the following variables influence the value of call options I. Level of interest rates II. Time to expiration of the option III. Dividend yield of underlying stock IV. Stock price volatility

Options sellers who are delta-hedging would most likely

Discuss the relationship between option prices and time to expiration, volatility of the underlying stocks, and the exercise price.

A portfolio consists of 100 shares of stock and 1500 calls on that stock.If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price

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.

Volatility risk is

Other things equal, the price of a stock call option is positively correlated with the following factors except

Other things equal, the price of a stock put option is positively correlated with the following factors except

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

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

Delta is defined as

Prior to expiration

Delta neutral

A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price

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Use the Black-Scholes option pricing model for the following problem.Given: S_O = $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily).No dividends will be paid before option expires.The value of the call option is

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.