Question 1

According to the put-call parity theorem,the payoffs associated with ownership of a call option can be replicated by __________________.

Accepted Answer

A)  shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price 
B)  buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price 
C)  buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price 
D)  shorting the underlying stock, lending the present value of the exercise price and buying a put on the same underlying stock and with the same exercise price 
A)  shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price 
B)  buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price 
C)  buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price 
D)  shorting the underlying stock, lending the present value of the exercise price and buying a put on the same underlying stock and with the same exercise price

Question 2

Which one of the following will increase the value of a put option?

Accepted Answer

A)  A decrease in the exercise price 
B)  A decrease in time to expiration of the put 
C)  An increase in the volatility of the underlying stock 
D)  An increase in stock price 
A)  A decrease in the exercise price 
B)  A decrease in time to expiration of the put 
C)  An increase in the volatility of the underlying stock 
D)  An increase in stock price

Question 3

A stock priced at $65 has a standard deviation of 30%. Three month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27 and the puts cost $1.10. The risk free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued.
-Hedge ratios for long puts are always __________.

Accepted Answer

A)  between -1 and 0 
B)  between 0 and 1 
C)  1 
D)  greater than 1 
A)  between -1 and 0 
B)  between 0 and 1 
C)  1 
D)  greater than 1

Question 4

Strike prices of options are adjusted for ____________ but not for ____________.

Accepted Answer

A)  dividends; stock splits 
B)  stock splits; cash dividends 
C)  exercise of warrants; stock splits 
D)  stock price movements; stock dividends 
A)  dividends; stock splits 
B)  stock splits; cash dividends 
C)  exercise of warrants; stock splits 
D)  stock price movements; stock dividends

Question 5

In the Black-Scholes model if an option is not likely to be exercised both N(d1)and N(d2)will be close to ______.If the option is definitely likely to be exercised N(d1)and N(d2)will be close to ______.

Accepted Answer

A)  1; 0 
B)  0; 1 
C)  -1; 1 
D)  1: -1 
A)  1; 0 
B)  0; 1 
C)  -1; 1 
D)  1: -1

Question 6

All else equal call option values are _____ if the _____ is lower.

Accepted Answer

A)  higher; stock price 
B)  higher; exercise price 
C)  lower; dividend payout 
D)  lower; stock volatility 
A)  higher; stock price 
B)  higher; exercise price 
C)  lower; dividend payout 
D)  lower; stock volatility

Question 7

A longer time to maturity will unambiguously increase the value of a call option because __________.
I.the longer maturity time reduces the effect of a dividend on call price
II.with a longer time to maturity the present value of the exercise price falls
III.with a longer time to maturity the range of possible stock prices at expiration increases

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III

Question 8

Before expiration the time value of an out-of-the money stock option is __________.

Accepted Answer

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

Question 9

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.

Accepted Answer

A)  the option is deep in the money 
B)  the option is approximately at the money 
C)  the option is far out of the money 
D)  time to expiration is very low 
A)  the option is deep in the money 
B)  the option is approximately at the money 
C)  the option is far out of the money 
D)  time to expiration is very low

Question 10

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________.

Accepted Answer

A)  long .70 calls for each short stock 
B)  long .70 shares for each long call 
C)  long .70 shares for each short call 
D)  short .70 calls for each long stock 
A)  long .70 calls for each short stock 
B)  long .70 shares for each long call 
C)  long .70 shares for each short call 
D)  short .70 calls for each long stock

Question 11

In the Black-Scholes model as the stock's price increases the values of N(d1)and N(d2)will _______ for a call and _______ for a put option.

Accepted Answer

A)  increase; decrease 
B)  increase; increase 
C)  decrease; increase 
D)  decrease; decrease 
A)  increase; decrease 
B)  increase; increase 
C)  decrease; increase 
D)  decrease; decrease

Question 12

Research suggests that option pricing models that allow for the possibility of ___________ provide more accurate pricing than does the basic Black-Scholes option pricing model.
I.early exercise
II.changing expected returns of the stock
III.time varying stock price volatility

Accepted Answer

A)  II only 
B)  I and III only 
C)  II and III only 
D)  I, II and III 
A)  II only 
B)  I and III only 
C)  II and III only 
D)  I, II and III

Question 13

The current stock price of Alcoa is $70 and the stock does not pay dividends.The instantaneous risk free rate of return is 6%.The instantaneous standard deviation of Alcoa's stock is 40%.You wish to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now.Based on the Black-Scholes OPM,the call option's delta will be __________.

Accepted Answer

A)  .28 
B)  .31 
C)  .62 
D)  .70 
A)  .28 
B)  .31 
C)  .62 
D)  .70

Question 14

The fact that American put values may not equal the price implied by put call parity is attributable to the possibility of what event?

Accepted Answer

A)  Changes in the dividend 
B)  Early exercise 
C)  Interest rate declines 
D)  Interest rate rises 
A)  Changes in the dividend 
B)  Early exercise 
C)  Interest rate declines 
D)  Interest rate rises

Question 15

A call option has an exercise price of $30 and a stock price of $34.If the call option is trading for $5.25,what is the intrinsic value of the option?

Accepted Answer

A)  $0.00 
B)  $1.25 
C)  $4.00 
D)  $5.25 
A)  $0.00 
B)  $1.25 
C)  $4.00 
D)  $5.25

Question 16

The current stock price of International Paper is $69 and the stock does not pay dividends. The instantaneous risk free rate of return is 10%. The instantaneous standard deviation of International Paper's stock is 25%. You wish to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now.
-Using the Black-Scholes OPM,the call option should be worth __________ today.

Accepted Answer

A)  $2.50 
B)  $2.94 
C)  $3.26 
D)  $3.50 
A)  $2.50 
B)  $2.94 
C)  $3.26 
D)  $3.50

Question 17

Research suggests that the performance of the Black-Scholes option pricing model has __________________.

Accepted Answer

A)  improved in recent years 
B)  remained about the same over time 
C)  been deficient for stocks with high dividend payouts 
D)  varied widely over the years since 1973 
A)  improved in recent years 
B)  remained about the same over time 
C)  been deficient for stocks with high dividend payouts 
D)  varied widely over the years since 1973

Question 18

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now.
-The stock price of Ajax Inc.is currently $105.The stock price a year from now will be either $130 or $90 with equal probabilities.The interest rate at which investors can borrow is 10%.Using the binomial OPM,the value of a call option with an exercise price of $110 and an expiration date one year from now should be worth __________ today.

Accepted Answer

A)  $11.59 
B)  $15.00 
C)  $20.00 
D)  $40.00 
A)  $11.59 
B)  $15.00 
C)  $20.00 
D)  $40.00

Question 19

The delta of a call option on a stock is always __________.

Accepted Answer

A)  negative and less than -1 
B)  between -1 and 1 
C)  positive 
D)  positive but less than 1 
A)  negative and less than -1 
B)  between -1 and 1 
C)  positive 
D)  positive but less than 1

Question 20

Perfect dynamic hedging requires _______________.

Accepted Answer

A)  a smaller capital outlay than static hedging 
B)  less commission expense than static hedging 
C)  daily rebalancing 
D)  continuous rebalancing 
A)  a smaller capital outlay than static hedging 
B)  less commission expense than static hedging 
C)  daily rebalancing 
D)  continuous rebalancing

According to the put-call parity theorem,the payoffs associated with ownership of a call option can be replicated by __________________.

Which one of the following will increase the value of a put option?

Strike prices of options are adjusted for but not for .

In the Black-Scholes model if an option is not likely to be exercised both N(d1)and N(d2)will be close to .If the option is definitely likely to be exercised N(d1)and N(d2)will be close to .

All else equal call option values are _ if the _ is lower.

Before expiration the time value of an out-of-the money stock option is __________.

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________.

In the Black-Scholes model as the stock's price increases the values of N(d1)and N(d2)will _ for a call and _ for a put option.

Research suggests that option pricing models that allow for the possibility of ___________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I.early exercise II.changing expected returns of the stock III.time varying stock price volatility

The fact that American put values may not equal the price implied by put call parity is attributable to the possibility of what event?

A call option has an exercise price of $30 and a stock price of $34.If the call option is trading for $5.25,what is the intrinsic value of the option?

Research suggests that the performance of the Black-Scholes option pricing model has __________________.

The delta of a call option on a stock is always __________.

Perfect dynamic hedging requires _______________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Exam 16: Option Valuation

According to the put-call parity theorem,the payoffs associated with ownership of a call option can be replicated by __________________.

Which one of the following will increase the value of a put option?

Strike prices of options are adjusted for ____________ but not for ____________.

In the Black-Scholes model if an option is not likely to be exercised both N(d1)and N(d2)will be close to ______.If the option is definitely likely to be exercised N(d1)and N(d2)will be close to ______.

All else equal call option values are _____ if the _____ is lower.

Before expiration the time value of an out-of-the money stock option is __________.

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________.

In the Black-Scholes model as the stock's price increases the values of N(d1)and N(d2)will _______ for a call and _______ for a put option.

Research suggests that option pricing models that allow for the possibility of ___________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I.early exercise II.changing expected returns of the stock III.time varying stock price volatility

The fact that American put values may not equal the price implied by put call parity is attributable to the possibility of what event?

A call option has an exercise price of $30 and a stock price of $34.If the call option is trading for $5.25,what is the intrinsic value of the option?

Research suggests that the performance of the Black-Scholes option pricing model has __________________.

The delta of a call option on a stock is always __________.

Perfect dynamic hedging requires _______________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Strike prices of options are adjusted for but not for .

In the Black-Scholes model if an option is not likely to be exercised both N(d1)and N(d2)will be close to .If the option is definitely likely to be exercised N(d1)and N(d2)will be close to .

All else equal call option values are _ if the _ is lower.

In the Black-Scholes model as the stock's price increases the values of N(d1)and N(d2)will _ for a call and _ for a put option.