Question 1

Assume the following data on a 6-month put option, using 3-month intervals as the time period. K = $40.00, S = $37.90, r = 5.0%, = .35. What is the binomial option price?

Accepted Answer

A)   $ 2.10
B)   $ 2.86
C)   $ 3.91
D)   $ 4.25 C

Question 2

Using a binomial tree explanation, explain the situation in which an American option would alter the pricing of an option.

Accepted Answer

The value of an American option at a node is the maximum of its intrinsic value or the discounted value of the subsequent nodes. Early exercise permits the realization of the intrinsic value, should it be the higher number. European options may not consider this potential gain.

Question 3

For a specific futures option, given d = .813 and u = 1.367, what is the risk neutral probability of an up move in the price of the option?

Accepted Answer

A)   41.87 %
B)   43.54 %
C)   47.98 %
D)   56.46 % B

Question 4

A stock is selling for $53.20. Interest rates are 6.0% and the returns on the stock have a standard deviation of 24.0%. What is the forecasted up movement in the stock over a 6- month interval?

Accepted Answer

A)   $64.96
B)   $69.69
C)   $73.48
D)   $76.96

Question 5

For an option trading in the money, what is the likely impact on the binomial option price as the number of binomial steps is increased?

Accepted Answer

A)   The price will fall
B)   The price will increase
C)   The price will remain constant
D)   The impact can not be determined

Question 6

Using a binomial tree, what is the price of a $40 strike 6-month put option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, σ = 0.35

Accepted Answer

A)   $3.52
B)   $3.66
C)   $3.84
D)   $3.91

Question 7

Draw the binomial tree listing only the option prices at each node. Assume the following data on a 6-month put option, using 3-month intervals as the time period. K = $40.00, S =
$37.90, r = 5.0%, σ = 0.35

Accepted Answer

The answer of Draw the binomial tree listing only the...

Question 8

In the case of a 1-year option, the current stock price is $52 per share. If the stock price has an equal chance of ending the year at either $58 or $45, what is the △ given an interest rate of 6.0% and an exercise price of $50?

Accepted Answer

A)   0.2145
B)   0.3254
C)   0.5411
D)   0.6154

Question 9

Draw the binomial tree listing only the option prices at each node. Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $40, S =
$37.90, r = 5.0%, σ = 0.35

Accepted Answer

The answer of Draw the binomial tree listing only the...

Question 10

Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $70, S = $68.50, r = 6.0%, = .32. What is the highest possible stock price associated with this data and the binomial pricing model?

Accepted Answer

A)   $ 51.26
B)   $ 68.50
C)   $ 70.59
D)   $ 91.21

Question 11

A stock is selling for $68.50. Interest rates are 6.0% and the returns on the stock have a standard deviation of 32.0%. What is the forecasted price of the stock using 3-month periods at Suudu?

Accepted Answer

A)   $74.08
B)   $94.24
C)   $100.17
D)   $111.12

Question 12

What is the binomial option price assuming the following data on a 6-month call option, using 3-month intervals as the time period? K = $40, S = $37.90, r = 5.0%, = .35

Accepted Answer

A)   $ 2.05
B)   $ 2.10
C)   $ 2.96
D)   $ 3.08

Question 13

A stock is selling for $53.20. Interest rates are 6.0% and the returns on the stock have a standard deviation of 24.0%. What is the forecasted up movement in the stock over 6 months, assuming two periods of 3 months each?

Accepted Answer

A)   $64.96
B)   $69.69
C)   $73.48
D)   $76.96

Question 14

Using a binomial tree, what is the price of a $40 strike 6-month call option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, σ = 0.35

Accepted Answer

A)   $2.50
B)   $2.76
C)   $2.92
D)   $3.08

Question 15

A stock is currently selling for $22.00 per share. Ignoring interest, determine the intrinsic value of a call option should there exist equally probable stock prices of $25.00 and $23.00.

Accepted Answer

A)   $0.00
B)   $1.00
C)   $2.00
D)   $3.00

Question 16

Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $50, S = $48, r = 4.0%, = .27. What is the highest expected stock price after 3 months according to the binomial model?

Accepted Answer

A)   $ 48.00
B)   $ 50.00
C)   $ 55.56
D)   $ 59.27

Question 17

Which number of binomial periods is most likely to produce the most accurate price?

Accepted Answer

A)   1
B)   2
C)   3
D)   4

Question 18

A stock is selling for $41.60. The strike price on a call, maturing in 6 months, is $45. The possible stock prices at the end of 6 months are $35.00 and $49.00. Interest rates are 5.0%. Given an under-priced option, what are the short sale proceeds in an arbitrage strategy?

Accepted Answer

A)   $6.36
B)   $8.22
C)   $10.43
D)   $11.89

Question 19

Explain the impact a constant dividend yield would have on the price of a call option.

Accepted Answer

The answer of Explain the impact a constant dividend yield...

Question 20

Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $50, S = $48, r = 4.0%, = .27. What is the risk neutral probability of an up move in the stock price?

Accepted Answer

A)   45.24 %
B)   47.25 %
C)   52.75 %
D)   54.76 %

Exam 10: Binomial Option Pricing