Question 1

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 options are correct. 
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 options are correct.

Question 2

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A)  0.60. 
B)  0.40. 
C)  −0.60. 
D)  −0.40. 
E)  −0.17. 
A)  0.60. 
B)  0.40. 
C)  −0.60. 
D)  −0.40. 
E)  −0.17.

Question 3

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

Question 4

Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

Accepted Answer

A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The time to expiration, stock volatility, and exercise price 
A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The time to expiration, stock volatility, and exercise price

Question 5

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call?

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 6

Other things equal, the price of a stock put option is positively correlated with which of the following factors?

Accepted Answer

A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The time to expiration, stock volatility, and exercise price 
A)  The stock price 
B)  The time to expiration 
C)  The stock volatility 
D)  The exercise price 
E)  The time to expiration, stock volatility, and exercise price

Question 7

The dollar change in the value of a stock call option is always

Accepted Answer

A)  lower than the dollar change in the value of the stock. 
B)  higher than the dollar change in the value of the stock. 
C)  negatively correlated with the change in the value of the stock. 
D)  higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. 
E)  lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. 
A)  lower than the dollar change in the value of the stock. 
B)  higher than the dollar change in the value of the stock. 
C)  negatively correlated with the change in the value of the stock. 
D)  higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. 
E)  lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

Question 8

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price.

Accepted Answer

A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not 
A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not

Question 9

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is 0.30, and the stock is currently selling for $46, what is the elasticity of the put?

Accepted Answer

A)  2.76 
B)  2.30 
C)  −7.67 
D)  −2.76 
E)  −2.30 
A)  2.76 
B)  2.30 
C)  −7.67 
D)  −2.76 
E)  −2.30

Question 10

Other things equal, the price of a stock call option is positively correlated with the following factors except

Accepted Answer

A)  the stock price. 
B)  the time to expiration. 
C)  the stock volatility. 
D)  the exercise price. 
A)  the stock price. 
B)  the time to expiration. 
C)  the stock volatility. 
D)  the exercise price.

Question 11

The intrinsic value of an in-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 options are correct. 
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 options are correct.

Question 12

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

Accepted Answer

A)  decreases; increases 
B)  decreases; decreases 
C)  increases; decreases 
D)  increases; increases 
E)  does not change; does not change 
A)  decreases; increases 
B)  decreases; decreases 
C)  increases; decreases 
D)  increases; increases 
E)  does not change; does not change

Question 13

Which of the inputs in the Black-Scholes option pricing model are directly observable?

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)  The price of the underlying security, risk-free rate of interest, and time to expiration 
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)  The price of the underlying security, risk-free rate of interest, and time to expiration

Question 14

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. 
A)  positive. 
B)  equal to zero. 
C)  negative. 
D)  equal to the stock price minus the exercise price.

Question 15

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

Accepted Answer

A)  long 0.85 calls for each short stock. 
B)  short 0.85 calls for each long stock. 
C)  long 0.85 shares for each short call. 
D)  long 0.85 shares for each long call. 
E)  None of the options are correct. 
A)  long 0.85 calls for each short stock. 
B)  short 0.85 calls for each long stock. 
C)  long 0.85 shares for each short call. 
D)  long 0.85 shares for each long call. 
E)  None of the options are correct.

Question 16

Relative to European puts, otherwise identical American put options

Accepted Answer

A)  are less valuable. 
B)  are more valuable. 
C)  are equal in value. 
D)  will always be exercised earlier. 
E)  None of the options are correct. 
A)  are less valuable. 
B)  are more valuable. 
C)  are equal in value. 
D)  will always be exercised earlier. 
E)  None of the options are correct.

Question 17

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

Accepted Answer

A)  equal to zero. 
B)  positive. 
C)  negative. 
D)  equal to the stock price minus the exercise price. 
E)  None of the options are correct. 
A)  equal to zero. 
B)  positive. 
C)  negative. 
D)  equal to the stock price minus the exercise price. 
E)  None of the options are correct.

Question 18

A hedge ratio for a put is always

Accepted Answer

A)  equal to one. 
B)  greater than one. 
C)  between zero and one. 
D)  between negative one and zero. 
E)  of no restricted value. 
A)  equal to one. 
B)  greater than one. 
C)  between zero and one. 
D)  between negative one and zero. 
E)  of no restricted value.

Question 19

Delta neutral

Accepted Answer

A)  is the volatility level for the stock that the option price implies. 
B)  is the continued updating of the hedge ratio as time passes. 
C)  is the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D)  means the portfolio has no tendency to change value as the underlying portfolio value changes. 
A)  is the volatility level for the stock that the option price implies. 
B)  is the continued updating of the hedge ratio as time passes. 
C)  is the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D)  means the portfolio has no tendency to change value as the underlying portfolio value changes.

Question 20

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

Accepted Answer

A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not 
A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not

Exam 21: Option Valuation

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

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be

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?

Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call?

Other things equal, the price of a stock put option is positively correlated with which of the following factors?

The dollar change in the value of a stock call option is always

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price.

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is 0.30, and the stock is currently selling for $46, what is the elasticity of the put?

Other things equal, the price of a stock call option is positively correlated with the following factors except

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

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

Which of the inputs in the Black-Scholes option pricing model are directly observable?

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

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

Relative to European puts, otherwise identical American put options

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

A hedge ratio for a put is always

Delta neutral

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

The price of a stock call option is correlated with the stock price and correlated with the strike price.

If the stock price decreases, the price of a put option on that stock , and that of a call option .

The price of a stock put option is correlated with the stock price and correlated with the strike price.