Question 1

Construct a binomial tree detailing the option information and payoffs for a call option with a $20 strike price that expires in one year.

Accepted Answer

The answer of Construct a binomial tree detailing the option...

Question 2

Consider a one-year,at-the-money call option on Taggart stock.The effect on the price of this call option due to an increase in the volatility from 25% to 40% is closest to:

Accepted Answer

A) $0.70 increase 
B) $1.70 decrease 
C) $2.30 increase 
D) $2.80 increase 
A) $0.70 increase 
B) $1.70 decrease 
C) $2.30 increase 
D) $2.80 increase

Question 3

Consider the following equation:
C = S × N  
- PV(K)× N  
In this equation,the term S represents:

Accepted Answer

A) the current price of the stock. 
B) the stock price at expiration. 
C) the annual volatility of the stock. 
D) strike price for the option. 
A) the current price of the stock. 
B) the stock price at expiration. 
C) the annual volatility of the stock. 
D) strike price for the option.

Question 4

Consider the following equation:
Boption =  
BS +  
BB
The term  
BB is:

Accepted Answer

A) always equal to zero since bB = 0. 
B) always positive since B is always positive. 
C) could be positive or negative depending on whether the option in question is a put or a call. 
D) always negative since B is always negative. 
A) always equal to zero since bB = 0. 
B) always positive since B is always positive. 
C) could be positive or negative depending on whether the option in question is a put or a call. 
D) always negative since B is always negative.

Question 5

Assuming the beta on Taggart stock is 0.75,then the beta for a one-year,at-the-money call option on Taggart stock is closest to:

Accepted Answer

A) 0.60 
B) 0.75 
C) 2.84 
D) 3.89 
A) 0.60 
B) 0.75 
C) 2.84 
D) 3.89

Question 6

The risk neutral probability of a down state for KD Industries is closest to:

Accepted Answer

A) 37.5% 
B) 62.5% 
C) 40.0% 
D) 60.0% 
A) 37.5% 
B) 62.5% 
C) 40.0% 
D) 60.0%

Question 7

Consider the following equation:
C = S × N  
- PV(K)× N  
In this equation,the term T represents:

Accepted Answer

A) the number of years to expiration. 
B) the annual volatility of the stock. 
C) the expected return on the stock. 
D) the number of days to expiration. 
A) the number of years to expiration. 
B) the annual volatility of the stock. 
C) the expected return on the stock. 
D) the number of days to expiration.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The option delta,Δ,has a natural interpretation: It is the change in the price of the stock given a $1 change in the price of the option. 
B) Because a leveraged position in a stock is riskier than the stock itself,this implies that call options on a positive beta stock are more risky than the underlying stock and therefore have higher returns and higher betas. 
C) Only one parameter input for the Black-Scholes formula,the volatility of the stock price,is not observable directly. 
D) Because a stock's volatility is much easier to measure (and forecast)than its expected return,the Black-Scholes formula can be very precise. 
A) The option delta,Δ,has a natural interpretation: It is the change in the price of the stock given a $1 change in the price of the option. 
B) Because a leveraged position in a stock is riskier than the stock itself,this implies that call options on a positive beta stock are more risky than the underlying stock and therefore have higher returns and higher betas. 
C) Only one parameter input for the Black-Scholes formula,the volatility of the stock price,is not observable directly. 
D) Because a stock's volatility is much easier to measure (and forecast)than its expected return,the Black-Scholes formula can be very precise.

Question 9

Which of the following is a corporate application of option pricing?

Accepted Answer

A) Calculating the beta of risk-free debt 
B) Calculating the agency cost of risky debt 
C) Calculating the agency cost of risky equity 
D) Calculating the alpha of risky equity 
A) Calculating the beta of risk-free debt 
B) Calculating the agency cost of risky debt 
C) Calculating the agency cost of risky equity 
D) Calculating the alpha of risky equity

Question 10

Risk neutral probabilities are also known as all of the following EXCEPT:

Accepted Answer

A) contingent probabilities. 
B) state-contingent prices. 
C) martingale prices. 
D) state prices. 
A) contingent probabilities. 
B) state-contingent prices. 
C) martingale prices. 
D) state prices.

Question 11

Using risk neutral probabilities,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:

Accepted Answer

A) $1.45 
B) $2.40 
C) $2.00 
D) $2.15 
A) $1.45 
B) $2.40 
C) $2.00 
D) $2.15

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) If you take the option price quoted in the market as an input and solve for the volatility,you will have an estimate of a stock's volatility known as the implied volatility. 
B) The Black-Scholes formula can be used to price American or European call options on non-dividend-paying stocks. 
C) We need to know the expected return on the stock to calculate the option price in the Black-Scholes Option Pricing Model. 
D) We can use the Black-Scholes formula to compute the price of a European put option on a non-dividend-paying stock by using the put-call parity formula. 
A) If you take the option price quoted in the market as an input and solve for the volatility,you will have an estimate of a stock's volatility known as the implied volatility. 
B) The Black-Scholes formula can be used to price American or European call options on non-dividend-paying stocks. 
C) We need to know the expected return on the stock to calculate the option price in the Black-Scholes Option Pricing Model. 
D) We can use the Black-Scholes formula to compute the price of a European put option on a non-dividend-paying stock by using the put-call parity formula.

Question 13

Use the information for the question(s)below.
The current price of KD Industries stock is $20.In the next year the stock price will either go up by 20% or go down by 20%.KD pays no dividends.The one year risk-free rate is 5% and will remain constant.
-The risk neutral probability of an up state for KD Industries is closest to:

Accepted Answer

A) 37.5% 
B) 60.0% 
C) 40.0% 
D) 62.5% 
A) 37.5% 
B) 60.0% 
C) 40.0% 
D) 62.5%

Question 14

Consider a one-year,at-the-money call option on Taggart stock.The effect on the price of this call option due to an increase in the risk-free rate from 4% to 6% is closest to:

Accepted Answer

A) $0.50 decrease 
B) $0.50 increase 
C) $0.70 decrease 
D) $0.80 increase 
A) $0.50 decrease 
B) $0.50 increase 
C) $0.70 decrease 
D) $0.80 increase

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The techniques of the binomial option pricing model are specific to European call and put options. 
B) We can summarize the payoffs for the Binomial Option Pricing Model in a binomial tree-a timeline with two branches at every date that represent the possible events that could happen at those times. 
C) We define the state in which the stock price goes up as the up state and the state in which the stock price goes down as the down state. 
D) When using the Binomial Option Pricing Model,by the Law of One Price,the price of the option today must equal the current market value of the replicating portfolio. 
A) The techniques of the binomial option pricing model are specific to European call and put options. 
B) We can summarize the payoffs for the Binomial Option Pricing Model in a binomial tree-a timeline with two branches at every date that represent the possible events that could happen at those times. 
C) We define the state in which the stock price goes up as the up state and the state in which the stock price goes down as the down state. 
D) When using the Binomial Option Pricing Model,by the Law of One Price,the price of the option today must equal the current market value of the replicating portfolio.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) In both the Binomial and Black-Scholes Pricing Models,we need to know the risk neutral probability of each possible future stock price to calculate the option price. 
B) In the real world,investors are risk averse.Thus,the expected return of a typical stock includes a positive risk premium to compensate investors for risk. 
C) Because no assumption on the risk preferences of investors is necessary to calculate the option price using either the Binomial Model or the Black-Scholes formula,the models must work for any set of preferences,including risk-neutral investors. 
D) If all market participants were risk neutral,then all financial assets (including options)would have the same cost of capital - the risk free rate of interest. 
A) In both the Binomial and Black-Scholes Pricing Models,we need to know the risk neutral probability of each possible future stock price to calculate the option price. 
B) In the real world,investors are risk averse.Thus,the expected return of a typical stock includes a positive risk premium to compensate investors for risk. 
C) Because no assumption on the risk preferences of investors is necessary to calculate the option price using either the Binomial Model or the Black-Scholes formula,the models must work for any set of preferences,including risk-neutral investors. 
D) If all market participants were risk neutral,then all financial assets (including options)would have the same cost of capital - the risk free rate of interest.

Question 17

Use the following information to answer the question(s)below.
(Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems. )
Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share.Taggart pays no dividends.The risk-free interest rate is 4%.
-The Black-Scholes value of a one-year,at-the-money call option on Taggart stock is closest to:

Accepted Answer

A) $1.45 
B) $3.15 
C) $4.75 
D) $9.50 
A) $1.45 
B) $3.15 
C) $4.75 
D) $9.50

Question 18

Which of the following is NOT an input required by the Black-Scholes option pricing model?

Accepted Answer

A) The expected volatility of the stock 
B) The expected return on the stock 
C) The risk-free interest rate 
D) The current stock price 
A) The expected volatility of the stock 
B) The expected return on the stock 
C) The risk-free interest rate 
D) The current stock price

Question 19

Use the following information to answer the question(s)below.
(Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems. )
Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share.Taggart pays no dividends.The risk-free interest rate is 4%.
-The Black-Scholes Δ of a one-year,at-the-money call option on Taggart stock is closest to:

Accepted Answer

A) 0.2850 
B) 0.4840 
C) 0.5160 
D) 0.6141 
A) 0.2850 
B) 0.4840 
C) 0.5160 
D) 0.6141

Question 20

The Black-Scholes value of a one-year European put option on Taggart stock with a strike price of $50 is closest to:

Accepted Answer

A) $1.45 
B) $3.15 
C) $4.75 
D) $9.50 
A) $1.45 
B) $3.15 
C) $4.75 
D) $9.50

Exam 21: Option Valuation

Construct a binomial tree detailing the option information and payoffs for a call option with a $20 strike price that expires in one year.

Consider a one-year,at-the-money call option on Taggart stock.The effect on the price of this call option due to an increase in the volatility from 25% to 40% is closest to:

Consider the following equation: C = S × N - PV(K)× N In this equation,the term S represents:

Consider the following equation: Boption = BS + BB The term BB is:

Assuming the beta on Taggart stock is 0.75,then the beta for a one-year,at-the-money call option on Taggart stock is closest to:

The risk neutral probability of a down state for KD Industries is closest to:

Consider the following equation: C = S × N - PV(K)× N In this equation,the term T represents:

Which of the following statements is FALSE?

Which of the following is a corporate application of option pricing?

Risk neutral probabilities are also known as all of the following EXCEPT:

Using risk neutral probabilities,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:

Which of the following statements is FALSE?

Consider a one-year,at-the-money call option on Taggart stock.The effect on the price of this call option due to an increase in the risk-free rate from 4% to 6% is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following is NOT an input required by the Black-Scholes option pricing model?

The Black-Scholes value of a one-year European put option on Taggart stock with a strike price of $50 is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Consider the following equation: B_optio_n = B_S + B_B The term B_B is: