Question 1

The models of pricing options give ________ option price no matter what the ________ and expected stock returns are.

Accepted Answer

A)  a different; actual risk preferences 
B)  the same; expected risk preferences 
C)  the same; actual risk preferences 
D)  a different; expected risk preferences 
A)  a different; actual risk preferences 
B)  the same; expected risk preferences 
C)  the same; actual risk preferences 
D)  a different; expected risk preferences C

Question 2

Which of the following statements is false?

Accepted Answer

A)  For a call written on a stock with a positive beta, the beta of the call always exceeds the beta of the stock. 
B)  The beta of a put option written on a negative beta stock is always negative. 
C)  As the stock price changes, the beta of an option will change, with its magnitude falling as the option goes in-the-money. 
D)  A put option is a hedge, so its price goes up when the stock price goes down. 
A)  For a call written on a stock with a positive beta, the beta of the call always exceeds the beta of the stock. 
B)  The beta of a put option written on a negative beta stock is always negative. 
C)  As the stock price changes, the beta of an option will change, with its magnitude falling as the option goes in-the-money. 
D)  A put option is a hedge, so its price goes up when the stock price goes down. B

Question 3

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.
-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 B

Question 4

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

Accepted Answer

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

Question 5

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.
-Which of the following statements is false?

Accepted Answer

A)  For companies with high debt-to-equity ratios, the approximation that the beta of debt is zero is unrealistic; such corporations have a positive probability of bankruptcy, and this uncertainty usually has systematic components. 
B)  When the debt is risky, the firm's equity is always in-the-money; thus Δ = 1. 
C)  If we let A be the value of the firm's assets, E be the value of equity, and D be the value of debt, then because equity is a call option on the assets of the firm, E = SΔ + B with A = E + D = S. 
D)  Equity can be viewed as a call option on the firm's assets. 
A)  For companies with high debt-to-equity ratios, the approximation that the beta of debt is zero is unrealistic; such corporations have a positive probability of bankruptcy, and this uncertainty usually has systematic components. 
B)  When the debt is risky, the firm's equity is always in-the-money; thus Δ = 1. 
C)  If we let A be the value of the firm's assets, E be the value of equity, and D be the value of debt, then because equity is a call option on the assets of the firm, E = SΔ + B with A = E + D = S. 
D)  Equity can be viewed as a call option on the firm's assets.

Question 6

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 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 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 9

________ on a positive beta stock have very large ________ betas,respectively.

Accepted Answer

A)  Calls and puts; negative and positive 
B)  Calls and puts; positive and negative 
C)  Puts and calls; positive and negative 
D)  None of the above 
A)  Calls and puts; negative and positive 
B)  Calls and puts; positive and negative 
C)  Puts and calls; positive and negative 
D)  None of the above

Question 10

Use the information for the question(s) below.
The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can either go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant.
-Using the binomial pricing model,calculate the price of a two-year put option on Kinston stock with a strike price of $9.

Accepted Answer

This problem requires a two period binom

Question 11

Which of the following statements is correct?

Accepted Answer

A)  It was in 2000 that Canadian accounting standards required firms to include stock option grants as part of their compensation expense. 
B)  Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense until the Asian flu happened in the mid-90s. 
C)  Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense until Nortel announced bankruptcy protection in 2009. 
D)  Until 2005, Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense. 
A)  It was in 2000 that Canadian accounting standards required firms to include stock option grants as part of their compensation expense. 
B)  Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense until the Asian flu happened in the mid-90s. 
C)  Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense until Nortel announced bankruptcy protection in 2009. 
D)  Until 2005, Canadian accounting standards did not require firms to include stock option grants as part of their compensation expense.

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

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 14

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 15

Use the information for the question(s) below.
The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can either go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant.
-Using risk-neutral probabilities,calculate the price of a two-year call option on Kinston stock with a strike price of $9.

Accepted Answer

p = @#IMG-DLM& = @#IMG-DLM& =

Question 16

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.
-Assuming the beta on KD stock is 1.1,the calculated beta for a one-year call option on KD stock with a strike price of $20 is closest to:

Accepted Answer

A)  -1.8 
B)  2.4 
C)  -7.7 
D)  4.6 
A)  -1.8 
B)  2.4 
C)  -7.7 
D)  4.6

Question 17

Consider the following equation: D =   In this equation,the term D represents

Accepted Answer

A)  the change in the stock price from the low state to the high state. 
B)  the number of shares of stock to buy for the replicating portfolio. 
C)  the position in bonds for the replicating portfolio. 
D)  the change in the stock price from the high state to the low state. 
A)  the change in the stock price from the low state to the high state. 
B)  the number of shares of stock to buy for the replicating portfolio. 
C)  the position in bonds for the replicating portfolio. 
D)  the change in the stock price from the high state to the low state.

Question 18

Which of the following statements is correct?

Accepted Answer

A)  Prior to the Black-Scholes formula, most economists and practitioners anticipated that mathematical formulas could be derived that could accurately price financial securities such as options. 
B)  Without the Black-Scholes formula, the job of corporate managers would be very different: many corporations would bear much less risk than they now do. 
C)  The most important factors contributing to the huge growth in the types of financial securities that are available today are the techniques that everyone uses to discount them. 
D)  It is not an exaggeration to say that the techniques developed by Black, Scholes, and Merton to value options changed the course of financial economics and gave birth to a new profession: financial engineering. 
A)  Prior to the Black-Scholes formula, most economists and practitioners anticipated that mathematical formulas could be derived that could accurately price financial securities such as options. 
B)  Without the Black-Scholes formula, the job of corporate managers would be very different: many corporations would bear much less risk than they now do. 
C)  The most important factors contributing to the huge growth in the types of financial securities that are available today are the techniques that everyone uses to discount them. 
D)  It is not an exaggeration to say that the techniques developed by Black, Scholes, and Merton to value options changed the course of financial economics and gave birth to a new profession: financial engineering.

Question 19

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.
-Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

Accepted Answer

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

Question 20

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.

Exam 15: Option Valuation

The models of pricing options give ________ option price no matter what the ________ and expected stock returns are.

Which of the following statements is false?

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

Which of the following statements is false?

________ on a positive beta stock have very large ________ betas,respectively.

Which of the following statements is correct?

Which of the following statements is false?

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

Consider the following equation: D = In this equation,the term D represents

Which of the following statements is correct?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

The models of pricing options give option price no matter what the and expected stock returns are.

on a positive beta stock have very large betas,respectively.