Question 1

The hedge ratio of an option is also called the option's

Accepted Answer

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

Question 2

Relative to European puts, otherwise identical American put options

Accepted Answer

A)   are less valuable.
B)   are more valuable.
C)   are equal in value.
D)   will always be exercised earlier.
E)   None of the options are correct.F) A) and B)
G) A) and C)

Question 3

The price of a stock is currently $38. Over the course of the next year, the price is anticipated to rise to $41 or decline to $36. If the upside has a 65% probability of occurring and the risk free interest rate is 3%, what is the price of a six month call option with an exercise price of $35 using the binomial model?

Accepted Answer

A)   $3.89
B)   $4.18
C)   $4.25
D)   $4.70E) B) and D)
F) None of the above

Question 4

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; increases
E)   does not change; does not changeF) B) and E)
G) B) and D)

Question 5

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 options are correct.F) B) and E)
G) A) and B)

Question 6

Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. 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 decreases
E)   Portfolio B if the stock price increases and portfolio A if it decreasesF) B) and C)
G) All of the above

Question 7

The Black-Scholes formula assumes thatI)  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 III
D)   I, II, and IV
E)   I, II, III, and IVF) A) and E)
G) B) and E)

Question 8

Other things equal, the price of a stock call 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 stock price, time to expiration, and stock volatilityF) C) and D)
G) C) and E)

Question 9

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

Accepted Answer

A)   positively; positively
B)   negatively; positively
C)   negatively; negatively
D)   positively; negatively
E)   not; notF) B) and E)
G) None of the above B

Question 10

The intrinsic value of an out-of-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) A) and B)
F) A) and C)

Question 11

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)   −0.17.F) B) and C)
G) B) and E)

Question 12

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price.

Accepted Answer

A)   positively; positively
B)   negatively; positively
C)   negatively; negatively
D)   positively; negatively
E)   not; notF) A) and E)
G) A) and B)

Question 13

If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A)   0.30.
B)   0.50.
C)   −0.60.
D)   −0.50.
E)   −0.17.F) B) and C)
G) A) and E) D

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) C) and D)

Question 15

The time value of a put option isI)  the difference between the option's price and the value it would have if it were expiring immediately.II)  the same as the present value of the option's expected future cash flows.III)  the difference between the option's price and its expected future value.IV)  different from the usual time value of money concept.

Accepted Answer

A)   I
B)   I and II
C)   II and III
D)   II
E)   I and IVF) A) and D)
G) B) and E)

Question 16

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 or out of the money.F) B) and D)
G) B) and C)

Question 17

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Accepted Answer

A)   the call price would increase.
B)   the call price would decrease.
C)   the call price would not change.
D)   the put price would decrease.
E)   the put price would not change.F) A) and E)
G) A) and B)

Question 18

Before 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)   None of the options are correct.F) A) and D)
G) A) and C)

Question 19

The elasticity of a stock put option is always

Accepted Answer

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

Question 20

Before expiration, the time value of an at-the-money call option is usually

Accepted Answer

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

Exam 21: Option Valuation

The hedge ratio of an option is also called the option's

Correct Answer
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D

Relative to European puts, otherwise identical American put options

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

Correct Answer
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Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?

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

Correct Answer
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The price of a stock put option is correlated with the stock price and correlated with the strike price.

Correct Answer
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B

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

Correct Answer
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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 price of a stock call option is correlated with the stock price and correlated with the strike price.

Correct Answer
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If the hedge ratio for a stock call is 0.50, 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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D

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

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

Correct Answer
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An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Correct Answer
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Before expiration, the time value of an at-the-money put option is always

Correct Answer
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The elasticity of a stock put option is always

Correct Answer
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Before expiration, the time value of an at-the-money call option is usually

Correct Answer
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Exam 21: Option Valuation

The hedge ratio of an option is also called the option's

Correct AnswerverifiedD

Relative to European puts, otherwise identical American put options

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price.

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

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 price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price.

Correct AnswerverifiedShow Answer

If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The elasticity of a stock put option is always

Correct AnswerverifiedShow Answer

Before expiration, the time value of an at-the-money call option is usually

Correct AnswerverifiedShow Answer

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D

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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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Correct Answer
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The price of a stock put option is correlated with the stock price and correlated with the strike price.

Correct Answer
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B

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Correct Answer
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The price of a stock call option is correlated with the stock price and correlated with the strike price.

Correct Answer
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D

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