Question 1

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)  None of the optionsF) A) and B)
G) C) and D)

Question 2

Which one of the following variables influence the value of put 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 IV
E)  I, II, and III onlyF) A) and D)
G) B) and C)

Question 3

An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the time value of the call

Accepted Answer

A)  $8
B)  $12
C)  $0
D)  $4
E)  Cannot be determined without more informationF) C) and E)
G) All of the above

Question 4

A put option has an intrinsic value of zero if the option is

Accepted Answer

A)  at the money.
B)  out of the money.
C)  in the money.
D)  at the money and in the money.
E)  at the money and out of the money.F) B) and D)
G) D) and E)

Question 5

Other things equal, the price of a stock put option is positively 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 price
E)  The time to expiration, stock volatility, and exercise priceF) A) and B)
G) C) and D)

Question 6

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) B) and D)
G) A) and B)

Question 7

The percentage change in the stock call option price divided by the percentage change in the stock price is called

Accepted Answer

A)  the elasticity of the option.
B)  the delta of the option.
C)  the theta of the option.
D)  the gamma of the option.E) A) and D)
F) None of the above

Question 8

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

Accepted Answer

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

Question 9

If the stock price increases, 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; increases
E)  does not change; does not changeF) D) and E)
G) None of the above

Question 10

The hedge ratio of an option is also called the options

Accepted Answer

A)  alpha.
B)  beta.
C)  sigma.
D)  delta.
E)  rho.F) A) and E)
G) B) and D)

Question 11

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) B) and C)
G) B) and D)

Question 12

Empirical tests of the Black-Scholes option pricing model

Accepted Answer

A)  show that the model generates values fairly close to the prices at which options trade.
B)  show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls.
C)  indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
D)  show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
E)  All of the options.F) B) and E)
G) A) and E)

Question 13

The intrinsic value of an in-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)  None of the optionsF) A) and E)
G) A) and B)

Question 14

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 C)
F) None of the above

Question 15

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) C) and D)
F) B) and D)

Question 16

Before 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)  None of the optionsF) C) and D)
G) A) and D)

Question 17

Other things equal, the price of a stock put 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 price
E)  The time to expiration, stock volatility, and exercise priceF) A) and E)
G) A) and C)

Question 18

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

Accepted Answer

A)  equal to zero.
B)  negative.
C)  positive.
D)  equal to the stock price minus the exercise price.
E)  None of the optionsF) A) and E)
G) D) and E)

Question 19

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) A) and B)
F) C) and D)

Question 20

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) C) and D)
F) A) and C)

Exam 21: Option Valuation

Vega is defined as

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

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

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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

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Other things equal, the price of a stock put option is positively correlated with which of the following factors

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A put option has an intrinsic value of zero if the option is

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

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The elasticity of an option is

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

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An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12. What is the time value of the call

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The hedge ratio of an option is also called the options

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The percentage change in the stock call option price divided by the percentage change in the stock price is called

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Which one of the following variables influence the value of put options I. Level of interest rates II. Time to expiration of the option III. Dividend yield of underlying stock IV. Stock price volatility

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Empirical tests of the Black-Scholes option pricing model

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Dynamic hedging is

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

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

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

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

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

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

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