Exam 16: Option Valuation

The current stock price of Howard & Howard is $64, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's stock is 20%. You want to purchase a put option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using Black-Scholes, the put option should be worth ________ today.

The Black-Scholes option-pricing formula was developed for ________.

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

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 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 ________.

Calculate the price of a European call option using the Black Scholes model and the following data: stock price = $56.80, exercise price = $55, time to expiration = 15 days, risk-free rate = 2.5%, standard deviation = 22%, dividend yield = 8%.

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

What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?

The hedge ratio is often called the option's ________.

The ________ is the difference between the actual call price and the intrinsic value.

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

Perfect dynamic hedging requires ________.

In order for a binomial option price to approach the Black Scholes price, ________.

A high dividend payout will ________ the value of a call option and ________ the value of a put option.

Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is ________.

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is ________ or the volatility you input into the model is too ________.

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

The current stock price of Howard & Howard is $64, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's stock is 20%. You want 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.

A stock with a stock and exercise price of $20 can either increase to $26 or decrease to $18 over the course of one year. In a one-period binomial option model, given an interest rate of 5% and equal probabilities, what is the likely option price? (Use annual compounding.)

The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper Corp. pays no dividends. A put option on Harper Corp. stock with an exercise price of $30 and an expiration date 73 days from now is worth $0.95 today. A call option on Harper Corp. stock with an exercise price of $30 and the same expiration date should be worth ________ today.

A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ________ and a time value of ________.