Exam 21: Option Valuation

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. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the option. IV) there will be no sudden extreme jumps in stock prices.

The elasticity of a stock call option is always

In volatile markets, dynamic hedging may be difficult to implement because

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. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that

Which of the variables affecting option pricing is not directly observable If this variable is estimated to be higher or lower than the variable actually is, how is the option valuation affected

The intrinsic value of an at-the-money call option is equal to

Portfolio A consists of 500 shares of stock and 500 calls on that stock.Portfolio B consists of 800 shares of stock.The call delta is 0.6.Which portfolio has a higher dollar exposure to a change in stock price

The intrinsic value of an in-of-the-money call option is equal to

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

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price

You are evaluating a stock that is currently selling for $30 per share.Over the investment period you think that the stock price might get as low as $25 or as high as $40.There is a call option available on the stock with an exercise price of $35.Answer the following questions about hedging your position in the stock.Assume that you will hold one share. What is the hedge ratio How much would you borrow to purchase the stock What is the amount of your net investment in the stock Complete the table below to show the value of your stock portfolio at the end of the holding period.

The intrinsic value of an out-of-the-money put option is equal to

An American call option buyer on a nondividend paying stock will

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

What is an option hedge ratio How does the hedge ratio for a call differ from that of a put (or are the two equivalent) Explain.

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price.

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

If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the same expiration date and exercise price as the call would be