Question 1

Stock prices and call option prices are:

Accepted Answer

A) unrelated. 
B) negatively correlated. 
C) directly related. 
D) perfectly related. 
E) inversely related. 
A) unrelated. 
B) negatively correlated. 
C) directly related. 
D) perfectly related. 
E) inversely related.

Question 2

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 3

Identify the five factors of the Black-Scholes option pricing model and identify whether each factor must increase or decrease to cause the price of a put option to increase.

Accepted Answer

The five factors of the Black-Scholes op

Question 4

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

Question 5

What is the put option premium given the following information?

Accepted Answer

A) $1.58 
B) $2.01 
C) $2.59 
D) $3.63 
E) $4.15 
A) $1.58 
B) $2.01 
C) $2.59 
D) $3.63 
E) $4.15

Question 6

A stock with a current price of $30 will either move up to $37 or down to $26 over the next period.The risk-free rate of interest is 2.5 percent.What is the value of a call option with a strike price of $35?

Accepted Answer

A) $0.49 
B) $0.68 
C) $0.86 
D) $0.97 
E) $1.21 
A) $0.49 
B) $0.68 
C) $0.86 
D) $0.97 
E) $1.21

Question 7

Mike was granted stock options on 1,000 shares of his employer's stock.The stock is currently selling for $27.70 a share and has a standard deviation of 36 percent.The option's strike price is $27.50 and the time to maturity is 10 years.What is the value of each option given a risk-free rate of 3 percent? Assume that no dividends are paid.

Accepted Answer

A) $14.35 
B) $15.67 
C) $17.80 
D) $20.15 
E) $22.70 
A) $14.35 
B) $15.67 
C) $17.80 
D) $20.15 
E) $22.70

Question 8

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 9

Which one of the following inputs for the Black-Scholes model is NOT directly observable?

Accepted Answer

A) time to option maturity 
B) risk-free interest rate 
C) stock price 
D) strike price 
E) stock price volatility 
A) time to option maturity 
B) risk-free interest rate 
C) stock price 
D) strike price 
E) stock price volatility

Question 10

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 11

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 12

Which two of the following are the key reasons why most major corporations issue employee stock options?
I.provide an employee benefit in place of a retirement plan
II.no immediate cost to the corporation
III.align management and shareholder interests
IV.replace employer-provided insurance benefits

Accepted Answer

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

Question 13

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 14

A stock with a current price of $28 will either move up by a factor of 1.10 or down by a factor of .90 each period over the next two periods.The risk-free rate of interest is 4 percent.What is the current value of a call option with a strike price of $30?

Accepted Answer

A) $1.36 
B) $1.49 
C) $1.71 
D) $2.09 
E) $2.13 
A) $1.36 
B) $1.49 
C) $1.71 
D) $2.09 
E) $2.13

Question 15

Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32.She has decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1402.The option delta is .582.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 16

What is the put option premium given the following information?

Accepted Answer

A) $3.62 
B) $4.23 
C) $4.47 
D) $4.89 
E) $5.01 
A) $3.62 
B) $4.23 
C) $4.47 
D) $4.89 
E) $5.01

Question 17

All else constant,which one of the following situations will produce the highest call price given a strike price of $25?

Accepted Answer

A) $30 stock price; 40 days to option expiration 
B) $30 stock price; 60 days to option expiration 
C) $35 stock price; 40 days to option expiration 
D) $35 stock price; 60 days to option expiration 
E) Insufficient information is provided to answer this question. 
A) $30 stock price; 40 days to option expiration 
B) $30 stock price; 60 days to option expiration 
C) $35 stock price; 40 days to option expiration 
D) $35 stock price; 60 days to option expiration 
E) Insufficient information is provided to answer this question.

Question 18

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 19

Which one of the following best describes the graphical relationship between stock prices and option prices?

Accepted Answer

A) linearity 
B) concavity 
C) convexity 
D) hyperbolic 
E) exponential 
A) linearity 
B) concavity 
C) convexity 
D) hyperbolic 
E) exponential

Question 20

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.

Stock prices and call option prices are:

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

Identify the five factors of the Black-Scholes option pricing model and identify whether each factor must increase or decrease to cause the price of a put option to increase.

What is the put option premium given the following information?

A stock with a current price of $30 will either move up to $37 or down to $26 over the next period.The risk-free rate of interest is 2.5 percent.What is the value of a call option with a strike price of $35?

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 inputs for the Black-Scholes model is NOT directly observable?

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

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 two of the following are the key reasons why most major corporations issue employee stock options? I.provide an employee benefit in place of a retirement plan II.no immediate cost to the corporation III.align management and shareholder interests IV.replace employer-provided insurance benefits

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

A stock with a current price of $28 will either move up by a factor of 1.10 or down by a factor of .90 each period over the next two periods.The risk-free rate of interest is 4 percent.What is the current value of a call option with a strike price of $30?

Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32.She has decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1402.The option delta is .582.How many option contracts must Laura write to effectively hedge her portfolio?

What is the put option premium given the following information?

All else constant,which one of the following situations will produce the highest call price given a strike price of $25?

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 best describes the graphical relationship between stock prices and option prices?

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

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

Stock prices and call option prices are:

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

Identify the five factors of the Black-Scholes option pricing model and identify whether each factor must increase or decrease to cause the price of a put option to increase.

What is the put option premium given the following information?

A stock with a current price of $30 will either move up to $37 or down to $26 over the next period.The risk-free rate of interest is 2.5 percent.What is the value of a call option with a strike price of $35?

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 inputs for the Black-Scholes model is NOT directly observable?

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

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 two of the following are the key reasons why most major corporations issue employee stock options? I.provide an employee benefit in place of a retirement plan II.no immediate cost to the corporation III.align management and shareholder interests IV.replace employer-provided insurance benefits

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

A stock with a current price of $28 will either move up by a factor of 1.10 or down by a factor of .90 each period over the next two periods.The risk-free rate of interest is 4 percent.What is the current value of a call option with a strike price of $30?

Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32.She has decided to hedge this portfolio using SPX call option contracts.The S&P 500 index is currently 1402.The option delta is .582.How many option contracts must Laura write to effectively hedge her portfolio?

What is the put option premium given the following information?

All else constant,which one of the following situations will produce the highest call price given a strike price of $25?

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 best describes the graphical relationship between stock prices and option prices?

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

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