Question 1

At expiration, the time value of an at-the-money put option is always

Accepted Answer

A)  equal to zero.
B)  equal to the stock price minus the exercise price.
C)  negative.
D)  positive.E) B) and D)
F) A) and D)

Question 2

The intrinsic value of an at-the-money put option is equal to

Accepted Answer

A)  the stock price minus the exercise price.
B)  the put premium.
C)  zero.
D)  the exercise price minus the stock price.E) B) and C)
F) A) and C)

Question 3

Which one of the following variables influences the value of call options? I)  Level of interest rates
II)  Time to expiration of the option
III)  Dividend yield of underlying stock
IV)  Stock price volatility

Accepted Answer

A)  I and IV only
B)  II and III only
C)  I, II, and IV only
D)  I, II, III, and IVE) B) and C)
F) All of the above

Question 4

The Black-Scholes formula assumes that I)  the risk-free interest rate is constant over the life of the option.
II)  the stock price volatility is constant over the life of the option.
III)  the expected rate of return on the stock is constant over the life of the option.
IV)  there will be no sudden extreme jumps in stock prices.

Accepted Answer

A)  I and II
B)  I and III
C)  II and II
D)  I, II, and IVE) A) and B)
F) C) and D)

Question 5

In volatile markets, dynamic hedging may be difficult to implement because

Accepted Answer

A)  prices move too quickly for effective rebalancing.
B)  as volatility increases, historical deltas are too low.
C)  price quotes may be delayed so that correct hedge ratios cannot be computed.
D)  volatile markets may cause trading halts.
E)  All of the options are correct.F) All of the above
G) A) and B)

Question 6

At expiration, the time value of an in-the-money call option is always

Accepted Answer

A)  equal to zero.
B)  positive.
C)  negative.
D)  equal to the stock price minus the exercise price.E) B) and D)
F) B) and C)

Question 7

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

Accepted Answer

A)  decreases; increases
B)  decreases; decreases
C)  increases; decreases
D)  increases; increasesE) C) and D)
F) B) and C)

Question 8

The elasticity of an option is

Accepted Answer

A)  the volatility level for the stock that the option price implies.
B)  the continued updating of the hedge ratio as time passes.
C)  the percentage change in the stock call-option price divided by the percentage change in the stock price.
D)  the sensitivity of the delta to the stock price.E) A) and B)
F) None of the above C

Question 9

Dynamic hedging is

Accepted Answer

A)  the volatility level for the stock that the option price implies.
B)  the continued updating of the hedge ratio as time passes.
C)  the percentage change in the stock call-option price divided by the percentage change in the stock price.
D)  the sensitivity of the delta to the stock price.E) A) and D)
F) C) and D)

Question 10

The elasticity of a stock put option is always

Accepted Answer

A)  positive.
B)  smaller than one.
C)  negative.
D)  infinite.E) A) and C)
F) A) and B) C

Question 11

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Accepted Answer

A)  -$345
B)  +$500
C)  -$580
D)  -$520E) B) and C)
F) A) and B)

Question 12

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

Accepted Answer

A)  The stock price
B)  The time to expiration
C)  The stock volatility
D)  The exercise priceE) C) and D)
F) B) and D)

Question 13

Which of the inputs in the Black-Scholes option pricing model are directly observable?

Accepted Answer

A)  The price of the underlying security
B)  The risk-free rate of interest
C)  The time to expiration
D)  The variance of returns of the underlying asset return
E)  The price of the underlying security, risk-free rate of interest, and time to expirationF) C) and D)
G) B) and C)

Question 14

The intrinsic value of an out-of-the-money call option is equal to

Accepted Answer

A)  the call premium.
B)  zero.
C)  the stock price minus the exercise price.
D)  the striking price.E) B) and D)
F) A) and B)

Question 15

The intrinsic value of an at-the-money call option is equal to

Accepted Answer

A)  the call premium.
B)  zero.
C)  the stock price plus the exercise price.
D)  the striking price.E) B) and D)
F) B) and C)

Question 16

Prior to expiration,

Accepted Answer

A)  the intrinsic value of a put option is greater than its actual value.
B)  the intrinsic value of a put option is always positive.
C)  the actual value of a put option is greater than the intrinsic value.
D)  the intrinsic value of a put option is always greater than its time value.E) All of the above
F) C) and D) C

Question 17

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A)  0.70.
B)  0.30.
C)  -0.70.
D)  -0.30.E) A) and B)
F) B) and D)

Question 18

The elasticity of a stock call option is always

Accepted Answer

A)  greater than one.
B)  smaller than one.
C)  negative.
D)  infinite.E) C) and D)
F) B) and D)

Question 19

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

Accepted Answer

A)  Portfolio B
B)  Portfolio A
C)  The two portfolios have the same exposure.
D)  Portfolio A if the stock price increases, and portfolio B if it decreasesE) None of the above
F) A) and B)

Question 20

Vega is defined as

Accepted Answer

A)  the change in the value of an option for a dollar change in the price of the underlying asset.
B)  the change in the value of the underlying asset for a dollar change in the call price.
C)  the percentage change in the value of an option for a 1% change in the value of the underlying asset.
D)  the change in the volatility of the underlying stock price.
E)  the sensitivity of an option's price to changes in volatility.F) None of the above
G) A) and D)

Exam 21: Option Valuation

At expiration, the time value of an at-the-money put option is always

Correct Answer
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The intrinsic value of an at-the-money put option is equal to

Correct Answer
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Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

Correct Answer
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Correct Answer
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In volatile markets, dynamic hedging may be difficult to implement because

Correct Answer
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At expiration, the time value of an in-the-money call option is always

Correct Answer
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If the stock price decreases, the price of a put option on that stock , and that of a call option .

Correct Answer
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The elasticity of an option is

Correct Answer
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C

Dynamic hedging is

Correct Answer
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The elasticity of a stock put option is always

Correct Answer
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C

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Correct Answer
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Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

Correct Answer
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Which of the inputs in the Black-Scholes option pricing model are directly observable?

Correct Answer
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The intrinsic value of an out-of-the-money call option is equal to

Correct Answer
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The intrinsic value of an at-the-money call option is equal to

Correct Answer
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Prior to expiration,

Correct Answer
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C

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Correct Answer
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The elasticity of a stock call option is always

Correct Answer
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Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

Correct Answer
verified

Vega is defined as

Correct Answer
verified

Exam 21: Option Valuation

At expiration, the time value of an at-the-money put option is always

Correct AnswerverifiedShow Answer

The intrinsic value of an at-the-money put option is equal to

Correct AnswerverifiedShow Answer

Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In volatile markets, dynamic hedging may be difficult to implement because

Correct AnswerverifiedShow Answer

At expiration, the time value of an in-the-money call option is always

Correct AnswerverifiedShow Answer

If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________.

Correct AnswerverifiedShow Answer

The elasticity of an option is

Correct AnswerverifiedC

Dynamic hedging is

Correct AnswerverifiedShow Answer

The elasticity of a stock put option is always

Correct AnswerverifiedC

A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Correct AnswerverifiedShow Answer

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

Correct AnswerverifiedShow Answer

Which of the inputs in the Black-Scholes option pricing model are directly observable?

Correct AnswerverifiedShow Answer

The intrinsic value of an out-of-the-money call option is equal to

Correct AnswerverifiedShow Answer

The intrinsic value of an at-the-money call option is equal to

Correct AnswerverifiedShow Answer

Prior to expiration,

Correct AnswerverifiedC

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Correct AnswerverifiedShow Answer

The elasticity of a stock call option is always

Correct AnswerverifiedShow Answer

Portfolio A consists of 600 shares of stock and 300 calls on that stock.Portfolio B consists of 685 shares of stock.The call delta is 0.3.Which portfolio has a higher dollar exposure to a change in stock price?

Correct AnswerverifiedShow Answer

Vega is defined as

Correct AnswerverifiedShow Answer

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If the stock price decreases, the price of a put option on that stock , and that of a call option .

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C

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C

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C

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