Exam 16: Option Valuation

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. -The option smirk in the Black-Scholes option model indicates that __________.

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. -Using the Black-Scholes OPM,the call option should be worth __________ today.

If you have an extremely "bullish" outlook on the stock market,you could attempt to maximize your rate of return by ________________.

The percentage change in the stock call option price divided by the percentage change in the stock price is the __________ of the option.

Hedge ratios for long call position are __________ and hedge ratios for long put positions are ____________.

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%.A put option on this stock with an exercise price of $75 and an expiration date 30 days from now.According to the Black-Scholes OPM,you should hold __________ shares of stock per 100 put options to hedge your risk.

Hedge ratios for long calls are always __________.

The Black-Scholes hedge ratio for a long call option is equal to __________.

A call option has an exercise price of $35 and a stock price of $36.50.If the call option is trading at $2.25,what is the time value embedded in the option?

The time value of a call option is likely to decline most rapidly ________ days before expiration?

According to the Black-Scholes option pricing model,two options on the same stock but with different exercise prices should always have the same _________________.

What combination of variables is likely to lead to the lowest time value?

A 45 call option on a stock priced at $50 is priced at $6.50.This call has an intrinsic value of ______ and a time value of _____.

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. -A put option has a strike price of $35 and a stock price of $38.If the call option is trading at $1.25,what is the time value embedded in the option?

Of the variables in the Black-Scholes OPM,the __________ is not directly observable.

In a binomial option model with three subintervals the probability that the stock price moves up every possible time is _________.

The value of a call option increases with all of the following except ___________.

What portfolio position in stock and T-Bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50?

You find the option prices for three June call options on the same stock.The 95 call has an implied volatility of 25%,the 100 call has an implied volatility of 25% and the 105 call has an implied volatility of 30%.If you believe this represents a mis-pricing situation you may wish to ____________________________.

The delta of an option is __________.