Question 1

Volatility risk is

Accepted Answer

A) the volatility level for the stock that the option price implies. 
B) the risk incurred from unpredictable changes in volatility. 
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. 
E) A and C. 
A) the volatility level for the stock that the option price implies. 
B) the risk incurred from unpredictable changes in volatility. 
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. 
E) A and C.

Question 2

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

Accepted Answer

A) the call premium. 
B) zero. 
C) the stock price plus the exercise price. 
D) the striking price. 
E) none of the above. 
A) the call premium. 
B) zero. 
C) the stock price plus the exercise price. 
D) the striking price. 
E) none of the above.

Question 3

What is the time value of the call?
Refer To:
21-82

Accepted Answer

A) $8 
B) $12 
C) $6 
D) $4 
E) cannot be determined without more information. 
A) $8 
B) $12 
C) $6 
D) $4 
E) cannot be determined without more information.

Question 4

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

Question 5

Portfolio A consists of 500 shares of stock and 500 calls on that stock.Portfolio B consists of 800 shares of stock.The call delta is 0.6.Which portfolio has a higher dollar exposure to a change in stock price?

Accepted Answer

A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases. 
A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases.

Question 6

A portfolio consists of 800 shares of stock and 100 calls on that stock.If the hedge ratio for the call is 0.5.What would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?

Accepted Answer

A) +$700 
B) -$850 
C) -$580 
D) -$520 
E) none of the above 
A) +$700 
B) -$850 
C) -$580 
D) -$520 
E) none of the above

Question 7

Portfolio A consists of 400 shares of stock and 400 calls on that stock.Portfolio B consists of 500 shares of stock.The call delta is 0.5.Which portfolio has a higher dollar exposure to a change in stock price?

Accepted Answer

A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases. 
A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases.

Question 8

The intrinsic value of an out-of-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 above. 
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 above.

Question 9

Options sellers who are delta-hedging would most likely

Accepted Answer

A) sell when markets are falling. 
B) buy when markets are rising. 
C) both A and B. 
D) sell whether markets are falling or rising. 
E) buy whether markets are falling or rising. 
A) sell when markets are falling. 
B) buy when markets are rising. 
C) both A and B. 
D) sell whether markets are falling or rising. 
E) buy whether markets are falling or rising.

Question 10

What is an option hedge ratio?
 How does the hedge ratio for a call differ from that of a put (or are the two equivalent)?
 Explain.

Accepted Answer

An option's hedge ratio is the change in

Question 11

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

Accepted Answer

A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases. 
A) Portfolio B. 
B) Portfolio A. 
C) The two portfolios have the same exposure. 
D) A if the stock price increases and B if it decreases. 
E) B if the stock price decreases and A if it increases.

Question 12

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

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) none of the above. 
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) none of the above.

Question 13

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. 
E) A and C. 
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. 
E) A and C.

Question 14

The intrinsic value of an in-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. 
E) none of the above. 
A) the call premium. 
B) zero. 
C) the stock price minus the exercise price. 
D) the striking price. 
E) none of the above.

Question 15

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 16

The intrinsic value of an at-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 above. 
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 above.

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. 
E) none of the above. 
A) the elasticity of the option. 
B) the delta of the option. 
C) the theta of the option. 
D) the gamma of the option. 
E) none of the above.

Question 18

Use the two-state put option value in this problem.SO= $100; X = $120; the two possibilities for STare $150 and $80.The range of P across the two states is _____; the hedge ratio is _______.

Accepted Answer

A) $0 and $40; -4/7 
B) $0 and $50; +4/7 
C) $0 and $40; +4/7 
D) $0 and $50; -4/7 
E) $20 and $40; +1/2 
A) $0 and $40; -4/7 
B) $0 and $50; +4/7 
C) $0 and $40; +4/7 
D) $0 and $50; -4/7 
E) $20 and $40; +1/2

Question 19

As the underlying stock's price increased,the call option valuation function's slope approaches

Accepted Answer

A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half times the value of the stock. 
E) infinity. 
A) zero. 
B) one. 
C) two times the value of the stock. 
D) one-half times the value of the stock. 
E) infinity.

Question 20

In volatile markets,dynamic hedging may be difficult to implement because

Accepted Answer

A) prices move too quickly for effective rebalancing. 
B) as volatility increases, historical deltas are too low. 
C) price quotes may be delayed so that correct hedge ratios cannot be computed. 
D) volatile markets may cause trading halts. 
E) all of the above. 
A) prices move too quickly for effective rebalancing. 
B) as volatility increases, historical deltas are too low. 
C) price quotes may be delayed so that correct hedge ratios cannot be computed. 
D) volatile markets may cause trading halts. 
E) all of the above.

Exam 21: Macroeconomic and Industry Analysis

Volatility risk is

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

What is the time value of the call? Refer To: 21-82

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

Portfolio A consists of 500 shares of stock and 500 calls on that stock.Portfolio B consists of 800 shares of stock.The call delta is 0.6.Which portfolio has a higher dollar exposure to a change in stock price?

A portfolio consists of 800 shares of stock and 100 calls on that stock.If the hedge ratio for the call is 0.5.What would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?

Portfolio A consists of 400 shares of stock and 400 calls on that stock.Portfolio B consists of 500 shares of stock.The call delta is 0.5.Which portfolio has a higher dollar exposure to a change in stock price?

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

Options sellers who are delta-hedging would most likely

What is an option hedge ratio? How does the hedge ratio for a call differ from that of a put (or are the two equivalent)? Explain.

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Dynamic hedging is

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

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.

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

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

Use the two-state put option value in this problem.SO= $100; X = $120; the two possibilities for STare $150 and $80.The range of P across the two states is _____; the hedge ratio is _______.

As the underlying stock's price increased,the call option valuation function's slope approaches

In volatile markets,dynamic hedging may be difficult to implement because

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

Use the two-state put option value in this problem.S_O= $100; X = $120; the two possibilities for S_Tare $150 and $80.The range of P across the two states is _; the hedge ratio is ___.