Question 1

The implied volatility of the returns on the underlying asset that is computed using the Black-Scholes option pricing model is referred to as which one of the following?

Accepted Answer

A) residual error 
B) implied mean return 
C) derived case volatility (DCV) 
D) forecast rho 
E) implied standard deviation (IS
D)  
A) residual error 
B) implied mean return 
C) derived case volatility (DCV) 
D) forecast rho 
E) implied standard deviation (IS
D)

Question 2

Which of the following affect the value of a call option?
I.strike price
II.time to maturity
III.standard deviation of the returns on a risk-free asset
IV.risk-free rate

Accepted Answer

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

Question 3

Which one of the following statements is correct?

Accepted Answer

A) Mergers benefit shareholders but not creditors. 
B) Positive NPV projects will automatically benefit both creditors and shareholders. 
C) Shareholders might prefer a negative NPV project over a positive NPV project. 
D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects. 
E) Mergers rarely affect bondholders. 
A) Mergers benefit shareholders but not creditors. 
B) Positive NPV projects will automatically benefit both creditors and shareholders. 
C) Shareholders might prefer a negative NPV project over a positive NPV project. 
D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects. 
E) Mergers rarely affect bondholders.

Question 4

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Accepted Answer

A) risk-free rate 
B) strike price 
C) standard deviation 
D) stock price 
E) life of the option 
A) risk-free rate 
B) strike price 
C) standard deviation 
D) stock price 
E) life of the option

Question 5

Which of the following statements are correct?
I.As the standard deviation of the returns on a stock increase,the value of a put option increases.
II.The value of a call option decreases as the time to expiration increases.
III.A decrease in the risk-free rate increases the value of a put option.
IV.Increasing the strike price increases the value of a put option.

Accepted Answer

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

Question 6

Explain why financial mergers tend to benefit bondholders more than shareholders.

Accepted Answer

Financial mergers tend to lower the risk

Question 7

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Accepted Answer

A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma. 
A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma.

Question 8

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Accepted Answer

An increase in the risk-free rate will i

Question 9

The Black-Scholes option pricing model can be used for:

Accepted Answer

A) American options but not European options. 
B) European options but not American options. 
C) call options but not put options. 
D) put options but not call options. 
E) both zero coupon bonds and coupon bonds. 
A) American options but not European options. 
B) European options but not American options. 
C) call options but not put options. 
D) put options but not call options. 
E) both zero coupon bonds and coupon bonds.

Question 10

A decrease in which of the following will increase the value of a put option on a stock?
I.time to expiration
II.stock price
III.exercise price
IV.risk-free rate

Accepted Answer

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

Question 11

What is the value of a 6-month put with a strike price of $27.25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A) $4.71 
B) $4.88 
C) $5.24 
D) $5.64 
E) $6.62 
A) $4.71 
B) $4.88 
C) $5.24 
D) $5.64 
E) $6.62

Question 12

Which of the following statements are correct?
I.Increasing the time to maturity may not increase the value of a European put.
II.Vega measures the sensitivity of an option's value to the passage of time.
III.Call options tend to be more sensitive to the passage of time than are put options.
IV.An increase in time decreases the value of a call option.

Accepted Answer

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

Question 13

What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A) $0 
B) $0.93 
C) $1.06 
D) $1.85 
E) $2.14 
A) $0 
B) $0.93 
C) $1.06 
D) $1.85 
E) $2.14

Question 14

Given the following information,what is the value of d2 as it is used in the Black-Scholes option pricing model?

Accepted Answer

A) -1.1346 
B) -0.8657 
C) -0.8241 
D) -0.7427 
E) -0.7238 
A) -1.1346 
B) -0.8657 
C) -0.8241 
D) -0.7427 
E) -0.7238

Question 15

Which one of the following statements related to the implied standard deviation (ISD)is correct?

Accepted Answer

A) The ISD is an estimate of the historical standard deviation of the underlying security. 
B) ISD is equal to (1 - D1). 
C) The ISD estimates the volatility of an option's price over the option's lifespan. 
D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration. 
E) ISD confirms the observable volatility of the return on the underlying security. 
A) The ISD is an estimate of the historical standard deviation of the underlying security. 
B) ISD is equal to (1 - D1). 
C) The ISD estimates the volatility of an option's price over the option's lifespan. 
D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration. 
E) ISD confirms the observable volatility of the return on the underlying security.

Question 16

Under European put-call parity,the present value of the strike price is equivalent to:

Accepted Answer

A) the current value of the stock minus the call premium. 
B) the market value of the stock plus the put premium. 
C) the present value of a government coupon bond with a face value equal to the strike price. 
D) a U.S. Treasury bill with a face value equal to the strike price. 
E) a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return. 
A) the current value of the stock minus the call premium. 
B) the market value of the stock plus the put premium. 
C) the present value of a government coupon bond with a face value equal to the strike price. 
D) a U.S. Treasury bill with a face value equal to the strike price. 
E) a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.

Question 17

For the equity of a firm to be considered a call option on the firm's assets,the firm must:

Accepted Answer

A) be in default. 
B) be leveraged. 
C) pay dividends. 
D) have a negative cash flow from operations. 
E) have a negative cash flow from assets. 
A) be in default. 
B) be leveraged. 
C) pay dividends. 
D) have a negative cash flow from operations. 
E) have a negative cash flow from assets.

Question 18

The delta of a call option on a firm's assets is 0.767.This means that a $75,000 project will increase the value of equity by:

Accepted Answer

A) $38,350. 
B) $45,336. 
C) $57,525. 
D) $64,627. 
E) $65,189. 
A) $38,350. 
B) $45,336. 
C) $57,525. 
D) $64,627. 
E) $65,189.

Question 19

Which one of the following can be used to replicate a protective put strategy?

Accepted Answer

A) riskless investment and stock purchase 
B) stock purchase and call option 
C) call option and riskless investment 
D) riskless investment 
E) call option, stock purchase, and riskless investment 
A) riskless investment and stock purchase 
B) stock purchase and call option 
C) call option and riskless investment 
D) riskless investment 
E) call option, stock purchase, and riskless investment

Exam 25: Option Valuation

The implied volatility of the returns on the underlying asset that is computed using the Black-Scholes option pricing model is referred to as which one of the following?

Which of the following affect the value of a call option? I.strike price II.time to maturity III.standard deviation of the returns on a risk-free asset IV.risk-free rate

Which one of the following statements is correct?

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Explain why financial mergers tend to benefit bondholders more than shareholders.

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

The Black-Scholes option pricing model can be used for:

A decrease in which of the following will increase the value of a put option on a stock? I.time to expiration II.stock price III.exercise price IV.risk-free rate

What is the value of a 6-month put with a strike price of $27.25 given the Black-Scholes option pricing model and the following information?

What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Given the following information,what is the value of d2 as it is used in the Black-Scholes option pricing model?

Which one of the following statements related to the implied standard deviation (ISD)is correct?

Under European put-call parity,the present value of the strike price is equivalent to:

For the equity of a firm to be considered a call option on the firm's assets,the firm must:

The delta of a call option on a firm's assets is 0.767.This means that a $75,000 project will increase the value of equity by:

Which one of the following can be used to replicate a protective put strategy?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Mergers and Acquisitions

Leasing

Filters

Given the following information,what is the value of d₂ as it is used in the Black-Scholes option pricing model?