Question 1

The VIX is a measure of which one of the following?

Accepted Answer

A)  changes in the daily trading volume of the NASDAQ 100 
B)  investor expectations of future market volatility of the S&P 500 
C)  minute-by-minute changes in the value of the NASDAQ 100 
D)  number of option contracts outstanding on the S&P 500 
E)  the opening and closing historical values of the S&P 500 
A)  changes in the daily trading volume of the NASDAQ 100 
B)  investor expectations of future market volatility of the S&P 500 
C)  minute-by-minute changes in the value of the NASDAQ 100 
D)  number of option contracts outstanding on the S&P 500 
E)  the opening and closing historical values of the S&P 500 B

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. A

Question 3

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 percent.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 percent? 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 D

Question 4

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)  $50 stock price; 60 days to option expiration 
B)  $50 stock price; 90 days to option expiration 
C)  $55 stock price; 60 days to option expiration 
D)  $55 stock price; 90 days to option expiration 
E)  Insufficient information is provided to answer this question. 
A)  $50 stock price; 60 days to option expiration 
B)  $50 stock price; 90 days to option expiration 
C)  $55 stock price; 60 days to option expiration 
D)  $55 stock price; 90 days to option expiration 
E)  Insufficient information is provided to answer this question.

Question 5

Which one of the following situations will produce the highest call price,all else constant?

Accepted Answer

A)  $29 stock price; $30 strike price 
B)  $41 stock price; $40 strike price 
C)  $20 stock price; $20 strike price 
D)  $34 stock price; $35 strike price 
E)  $24 stock price; $25 strike price 
A)  $29 stock price; $30 strike price 
B)  $41 stock price; $40 strike price 
C)  $20 stock price; $20 strike price 
D)  $34 stock price; $35 strike price 
E)  $24 stock price; $25 strike price

Question 6

You own 800 shares of Bradley Co.stock that is currently priced at $33 a share.Given this price,the option delta for a $35 call option on this stock is 0.66.How many $35 call options do you need to hedge against a -$1 change in the price of the stock?

Accepted Answer

A)  buy 1,212 options 
B)  buy 1,813 options 
C)  buy 1,847 options 
D)  write 1,212 options 
E)  write 1,847 options 
A)  buy 1,212 options 
B)  buy 1,813 options 
C)  buy 1,847 options 
D)  write 1,212 options 
E)  write 1,847 options

Question 7

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 8

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 9

VIX represents the volatility index on which one of the following?

Accepted Answer

A)  Wilshire 3000 index 
B)  DJIA 
C)  S&P 500 index 
D)  Dow Jones Transportation average 
E)  NASDAQ 100 
A)  Wilshire 3000 index 
B)  DJIA 
C)  S&P 500 index 
D)  Dow Jones Transportation average 
E)  NASDAQ 100

Question 10

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 11

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Accepted Answer

A)  weekly 
B)  annually 
C)  just prior to the fiscal year end 
D)  at option expiration 
E)  only when the options are in-the-money 
A)  weekly 
B)  annually 
C)  just prior to the fiscal year end 
D)  at option expiration 
E)  only when the options are in-the-money

Question 12

Which one of the following statements is correct?

Accepted Answer

A)  Both call and put option deltas are always positive. 
B)  Put option deltas are always positive. 
C)  Call option deltas are always positive. 
D)  Both call and put option deltas are always negative. 
E)  All deltas can be positive, negative, or equal to zero. 
A)  Both call and put option deltas are always positive. 
B)  Put option deltas are always positive. 
C)  Call option deltas are always positive. 
D)  Both call and put option deltas are always negative. 
E)  All deltas can be positive, negative, or equal to zero.

Question 13

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma (σ),and call and put prices is correct?

Accepted Answer

A)  Call and put prices react fairly similarly in response to changes in sigma. 
B)  Call prices increase and put prices decrease as sigma increases. 
C)  Put price increase and call prices decrease as sigma increases. 
D)  Call prices increase and put prices remain relatively constant and sigma increases. 
E)  Neither put nor call prices are affected by changes in sigma. 
A)  Call and put prices react fairly similarly in response to changes in sigma. 
B)  Call prices increase and put prices decrease as sigma increases. 
C)  Put price increase and call prices decrease as sigma increases. 
D)  Call prices increase and put prices remain relatively constant and sigma increases. 
E)  Neither put nor call prices are affected by changes in sigma.

Question 14

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 1502.The option delta is 0.543.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 15

You know that a call will finish in-the-money.Based on that single piece of information,you also know which one of the following?

Accepted Answer

A)  The stock price will equal the strike price at expiration. 
B)  The risk-free rate is zero percent. 
C)  A put on the same underlying asset with the same strike and expiration will finish out-of-the-money. 
D)  The strike price will exceed the stock price at expiration. 
E)  The price of the call is equal to the price of the put. 
A)  The stock price will equal the strike price at expiration. 
B)  The risk-free rate is zero percent. 
C)  A put on the same underlying asset with the same strike and expiration will finish out-of-the-money. 
D)  The strike price will exceed the stock price at expiration. 
E)  The price of the call is equal to the price of the put.

Question 16

Which option price(s)will increase when the interest rate increases?

Accepted Answer

A)  both the call and put 
B)  call only 
C)  put only 
D)  neither the call nor the put 
E)  Answer cannot be determined from the information provided. 
A)  both the call and put 
B)  call only 
C)  put only 
D)  neither the call nor the put 
E)  Answer cannot be determined from the information provided.

Question 17

An increase in which one of the following will have a negative effect on the price of a call option?

Accepted Answer

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

Question 18

Which of the following are typical characteristics of employee stock options?
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 19

What is the put option premium given the following information?

Accepted Answer

A)  $1.58 
B)  $2.01 
C)  $2.59 
D)  $3.96 
E)  $4.15 
A)  $1.58 
B)  $2.01 
C)  $2.59 
D)  $3.96 
E)  $4.15

Question 20

You have an equity portfolio valued at $1.55 million that has a beta of 1.21.You have decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1457.The option delta is 0.6435.How many option contracts must you write to effectively hedge your portfolio?

Accepted Answer

A)  14 contracts 
B)  18 contracts 
C)  20 contracts 
D)  25 contracts 
E)  28 contracts 
A)  14 contracts 
B)  18 contracts 
C)  20 contracts 
D)  25 contracts 
E)  28 contracts

The VIX is a measure of which one of the following?

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

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 situations will produce the highest call price,all else constant?

You own 800 shares of Bradley Co.stock that is currently priced at $33 a share.Given this price,the option delta for a $35 call option on this stock is 0.66.How many $35 call options do you need to hedge against a -$1 change in the price of the stock?

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

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

VIX represents the volatility index on which one of the following?

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

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Which one of the following statements is correct?

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma (σ),and call and put prices is correct?

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 1502.The option delta is 0.543.How many option contracts must Laura write to effectively hedge her portfolio?

You know that a call will finish in-the-money.Based on that single piece of information,you also know which one of the following?

Which option price(s)will increase when the interest rate increases?

An increase in which one of the following will have a negative effect on the price of a call option?

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

What is the put option premium given the following information?

You have an equity portfolio valued at $1.55 million that has a beta of 1.21.You have decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1457.The option delta is 0.6435.How many option contracts must you write to effectively hedge your portfolio?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 16: Option Valuation

The VIX is a measure of which one of the following?

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

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 situations will produce the highest call price,all else constant?

You own 800 shares of Bradley Co.stock that is currently priced at $33 a share.Given this price,the option delta for a $35 call option on this stock is 0.66.How many $35 call options do you need to hedge against a -$1 change in the price of the stock?

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

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

VIX represents the volatility index on which one of the following?

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

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Which one of the following statements is correct?

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma (σ),and call and put prices is correct?

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 1502.The option delta is 0.543.How many option contracts must Laura write to effectively hedge her portfolio?

You know that a call will finish in-the-money.Based on that single piece of information,you also know which one of the following?

Which option price(s)will increase when the interest rate increases?

An increase in which one of the following will have a negative effect on the price of a call option?

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

What is the put option premium given the following information?

You have an equity portfolio valued at $1.55 million that has a beta of 1.21.You have decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1457.The option delta is 0.6435.How many option contracts must you write to effectively hedge your portfolio?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters