Exam 16: Option Valuation

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

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.

Hedge ratios for long call positions are ________, and hedge ratios for long put positions are ________.

You are considering purchasing a call option with a strike price of $35. The price of the underlying stock is currently $27. Without any further information, you would expect the hedge ratio for this option to be ________.

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

You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be ________.

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

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

The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's stock is 40%. You want to purchase 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.

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 mispricing situation. you may want to ________.

The delta of an option is ________.

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

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.

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

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. If you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be ________.

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

Hedge ratios for long calls are always ________.

If a stock price increases, the price of a put option on the stock will ________ and the price of a call option on the stock will ________.

The intrinsic value of a call option is equal to ________.

You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. 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?