Question 1

Which one of the following is an argument against repricing employee stock options?

Accepted Answer

A)  ESO's are originally issued with positive intrinsic value so there's no reason to reprice. 
B)  Employees have more incentive when options are "under-water". 
C)  Repricing is a reward for failure. 
D)  It is unnecessary to reprice as ESOs expire quickly. 
E)  Repricing affects the market price of the firm's stock for all shareholders. 
A)  ESO's are originally issued with positive intrinsic value so there's no reason to reprice. 
B)  Employees have more incentive when options are "under-water". 
C)  Repricing is a reward for failure. 
D)  It is unnecessary to reprice as ESOs expire quickly. 
E)  Repricing affects the market price of the firm's stock for all shareholders.

Question 2

A stock with a current price of $18 will either move up by a factor of 1.2 or down by a factor of 0.9 each period over the next two periods.The risk-free rate of interest is 4.5 percent.What is the current value of a call option with a strike price of $20?

Accepted Answer

A)  $1.02 
B)  $1.08 
C)  $1.17 
D)  $1.21 
E)  $1.27 
A)  $1.02 
B)  $1.08 
C)  $1.17 
D)  $1.21 
E)  $1.27

Question 3

The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the ________.

Accepted Answer

A)  VIX; VXO 
B)  VIX; VXN 
C)  VXO; VIX 
D)  VXO; VXN 
E)  VXN; VIX 
A)  VIX; VXO 
B)  VIX; VXN 
C)  VXO; VIX 
D)  VXO; VXN 
E)  VXN; VIX

Question 4

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 5

What is the put option premium given the following information?

Accepted Answer

A)  $1.20 
B)  $1.54 
C)  $1.82 
D)  $2.01 
E)  $2.21 
A)  $1.20 
B)  $1.54 
C)  $1.82 
D)  $2.01 
E)  $2.21

Question 6

You own shares of AZT stock.Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock?
I.buy call options
II.write call options
III.buy put options
IV.write put options

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 7

You own 1,500 shares of ABC stock that is currently priced at $27 a share.Given this price,the option delta for a $25 call option on this stock is 0.724.How many $25 call options do you need to hedge against a -$1 change in the price of the stock?

Accepted Answer

A)  buy 1,500 options 
B)  buy 2,482 options 
C)  write 1,500 options 
D)  write 2,072 options 
E)  write 3,295 options 
A)  buy 1,500 options 
B)  buy 2,482 options 
C)  write 1,500 options 
D)  write 2,072 options 
E)  write 3,295 options

Question 8

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 1602.The option delta is 0.53.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 9

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)  $30 stock price; 20 percent standard deviation 
B)  $30 stock price; 25 percent standard deviation 
C)  $35 stock price; 20 percent standard deviation 
D)  $35 stock price; 25 percent standard deviation 
E)  Insufficient information is provided to answer this question. 
A)  $30 stock price; 20 percent standard deviation 
B)  $30 stock price; 25 percent standard deviation 
C)  $35 stock price; 20 percent standard deviation 
D)  $35 stock price; 25 percent standard deviation 
E)  Insufficient information is provided to answer this question.

Question 10

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)  $15 strike price; 45 days to option expiration 
B)  $15 strike price; 60 days to option expiration 
C)  $20 strike price; 45 days to option expiration 
D)  $20 strike price; 60 days to option expiration 
E)  Insufficient information is provided to answer this question. 
A)  $15 strike price; 45 days to option expiration 
B)  $15 strike price; 60 days to option expiration 
C)  $20 strike price; 45 days to option expiration 
D)  $20 strike price; 60 days to option expiration 
E)  Insufficient information is provided to answer this question.

Question 11

All else constant,which one of the following situations will produce the highest call price given a strike price of $27.50?

Accepted Answer

A)  $25 stock price; 15 percent standard deviation 
B)  $25 stock price; 30 percent standard deviation 
C)  $30 stock price; 15 percent standard deviation 
D)  $30 stock price; 30 percent standard deviation 
E)  Insufficient information is provided to answer this question. 
A)  $25 stock price; 15 percent standard deviation 
B)  $25 stock price; 30 percent standard deviation 
C)  $30 stock price; 15 percent standard deviation 
D)  $30 stock price; 30 percent standard deviation 
E)  Insufficient information is provided to answer this question.

Question 12

A 6-month call option on ABC stock is priced at $2.80.The call option delta is 0.66.How will the approximate call option price be computed if the underlying stock price increases by $1?

Accepted Answer

A)  $2.80 
B)  $2.80 - $0.66 
C)  $2.80 + $0.66 
D)  $2.80 × 0.66 
E)  $2.80 × (1 + 0.66) 
A)  $2.80 
B)  $2.80 - $0.66 
C)  $2.80 + $0.66 
D)  $2.80 × 0.66 
E)  $2.80 × (1 + 0.66)

Question 13

A stock is currently priced at $25 a share while the $30 put option is priced at $4.14.The put option delta is -0.20.What is the approximate put price if the stock increases in value to $28?

Accepted Answer

A)  $3.94 
B)  $4.97 
C)  $5.08 
D)  $5.27 
E)  $5.50 
A)  $3.94 
B)  $4.97 
C)  $5.08 
D)  $5.27 
E)  $5.50

Question 14

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

Which one of the following is an argument against repricing employee stock options?

A stock with a current price of $18 will either move up by a factor of 1.2 or down by a factor of 0.9 each period over the next two periods.The risk-free rate of interest is 4.5 percent.What is the current value of a call option with a strike price of $20?

The S&P 500 volatility index is the while the NASDAQ 100 volatility index is the .

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

What is the put option premium given the following information?

You own shares of AZT stock.Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock? I.buy call options II.write call options III.buy put options IV.write put options

You own 1,500 shares of ABC stock that is currently priced at $27 a share.Given this price,the option delta for a $25 call option on this stock is 0.724.How many $25 call options do you need to hedge against a -$1 change in the price of the stock?

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 1602.The option delta is 0.53.How many option contracts must Lynn write to effectively hedge her portfolio?

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 put price,all else constant? Assume the options are all in-the-money.

All else constant,which one of the following situations will produce the highest call price given a strike price of $27.50?

A 6-month call option on ABC stock is priced at $2.80.The call option delta is 0.66.How will the approximate call option price be computed if the underlying stock price increases by $1?

A stock is currently priced at $25 a share while the $30 put option is priced at $4.14.The put option delta is -0.20.What is the approximate put price if the stock increases in value to $28?

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

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

Which one of the following is an argument against repricing employee stock options?

A stock with a current price of $18 will either move up by a factor of 1.2 or down by a factor of 0.9 each period over the next two periods.The risk-free rate of interest is 4.5 percent.What is the current value of a call option with a strike price of $20?

The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the ________.

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

What is the put option premium given the following information?

You own shares of AZT stock.Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock? I.buy call options II.write call options III.buy put options IV.write put options

You own 1,500 shares of ABC stock that is currently priced at $27 a share.Given this price,the option delta for a $25 call option on this stock is 0.724.How many $25 call options do you need to hedge against a -$1 change in the price of the stock?

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 1602.The option delta is 0.53.How many option contracts must Lynn write to effectively hedge her portfolio?

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 put price,all else constant? Assume the options are all in-the-money.

All else constant,which one of the following situations will produce the highest call price given a strike price of $27.50?

A 6-month call option on ABC stock is priced at $2.80.The call option delta is 0.66.How will the approximate call option price be computed if the underlying stock price increases by $1?

A stock is currently priced at $25 a share while the $30 put option is priced at $4.14.The put option delta is -0.20.What is the approximate put price if the stock increases in value to $28?

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

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

The S&P 500 volatility index is the while the NASDAQ 100 volatility index is the .