Question 1

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

Accepted Answer

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

Question 2

Vega 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) the sensitivity of an option's price to changes in volatility. 
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) the sensitivity of an option's price to changes in volatility.

Question 3

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

Accepted Answer

A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price 
E) The time to expiration, stock volatility, and exercise price 
A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price 
E) The time to expiration, stock volatility, and exercise price

Question 4

Dynamic hedging is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
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 continued updating of the hedge ratio as time passes. 
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 5

At expiration, the time value of an in-the-money call option is always

Accepted Answer

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

Question 6

Which one of the following variables influence the value of put 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

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

Accepted Answer

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

Question 8

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

Accepted Answer

A) positive. 
B) equal to zero. 
C) negative. 
D) equal to the stock price minus the exercise price. 
A) positive. 
B) equal to zero. 
C) negative. 
D) equal to the stock price minus the exercise price.

Question 9

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

Accepted Answer

A) the call premium. 
B) zero. 
C) the stock price minus the exercise price. 
D) the striking price. 
A) the call premium. 
B) zero. 
C) the stock price minus the exercise price. 
D) the striking price.

Question 10

The hedge ratio of an option is also called the options

Accepted Answer

A) alpha. 
B) beta. 
C) sigma. 
D) delta. 
E) rho. 
A) alpha. 
B) beta. 
C) sigma. 
D) delta. 
E) rho.

Question 11

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

Accepted Answer

A) the stock price minus the exercise price. 
B) the put premium. 
C) zero. 
D) the exercise price minus the stock price. 
E) None of the options 
A) the stock price minus the exercise price. 
B) the put premium. 
C) zero. 
D) the exercise price minus the stock price. 
E) None of the options

Question 12

Empirical tests of the Black-Scholes option pricing model

Accepted Answer

A) show that the model generates values fairly close to the prices at which options trade. 
B) show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls. 
C) indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
D) show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
E) All of the options. 
A) show that the model generates values fairly close to the prices at which options trade. 
B) show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls. 
C) indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
D) show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. 
E) All of the options.

Question 13

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

Accepted Answer

A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price 
E) The time to expiration, stock volatility, and exercise price 
A) The stock price 
B) The time to expiration 
C) The stock volatility 
D) The exercise price 
E) The time to expiration, stock volatility, and exercise price

Question 14

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 time value of the call

Accepted Answer

A) $8 
B) $12 
C) $0 
D) $4 
E) Cannot be determined without more information 
A) $8 
B) $12 
C) $0 
D) $4 
E) Cannot be determined without more information

Question 15

The elasticity of an option is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the continued updating of the hedge ratio as time passes. 
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 continued updating of the hedge ratio as time passes. 
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 16

Which of the inputs in the Black-Scholes option pricing model are directly observable

Accepted Answer

A) The price of the underlying security 
B) The risk-free rate of interest 
C) The time to expiration 
D) The variance of returns of the underlying asset return 
E) The price of the underlying security, risk-free rate of interest, and time to expiration 
A) The price of the underlying security 
B) The risk-free rate of interest 
C) The time to expiration 
D) The variance of returns of the underlying asset return 
E) The price of the underlying security, risk-free rate of interest, and time to expiration

Question 17

The percentage change in the stock call option price divided by the percentage change in the stock price is called

Accepted Answer

A) the elasticity of the option. 
B) the delta of the option. 
C) the theta of the option. 
D) the gamma of the option. 
A) the elasticity of the option. 
B) the delta of the option. 
C) the theta of the option. 
D) the gamma of the option.

Question 18

A put option has an intrinsic value of zero if the option is

Accepted Answer

A) at the money. 
B) out of the money. 
C) in the money. 
D) at the money and in the money. 
E) at the money and out of the money. 
A) at the money. 
B) out of the money. 
C) in the money. 
D) at the money and in the money. 
E) at the money and out of the money.

Question 19

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, 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) -$345 
B) +$500 
C) -$580 
D) -$520 
A) -$345 
B) +$500 
C) -$580 
D) -$520

Question 20

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________.

Accepted Answer

A) decreases; increases 
B) decreases; decreases 
C) increases; decreases 
D) increases; increases 
E) does not change; does not change 
A) decreases; increases 
B) decreases; decreases 
C) increases; decreases 
D) increases; increases 
E) does not change; does not change

Exam 21: Option Valuation

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

Vega is defined as

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

Dynamic hedging is

At expiration, the time value of an in-the-money call option is always

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

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

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

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

The hedge ratio of an option is also called the options

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

Empirical tests of the Black-Scholes option pricing model

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

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 time value of the call

The elasticity of an option is

Which of the inputs in the Black-Scholes option pricing model are directly observable

The percentage change in the stock call option price divided by the percentage change in the stock price is called

A put option has an intrinsic value of zero if the option is

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

If the stock price increases, the price of a put option on that stock and that of a call option .