Question 1

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

Question 2

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

Accepted Answer

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

Question 3

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; not 
A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not B

Question 4

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

Question 5

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)  $4.70 
A)  $3.89 
B)  $4.18 
C)  $4.25 
D)  $4.70

Question 6

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 volatility 
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 volatility

Question 7

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. 
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.

Question 8

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. 
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.

Question 9

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 IV 
A)  I 
B)  I and II 
C)  II and III 
D)  II 
E)  I and IV

Question 10

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. 
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.

Question 11

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. 
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.

Question 12

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. 
A)  0.70. 
B)  0.30. 
C)  −0.70. 
D)  −0.30. 
E)  −0.17.

Question 13

The elasticity of a stock put option is always

Accepted Answer

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

Question 14

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

Question 15

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 change 
A)  decreases; increases 
B)  decreases; decreases 
C)  increases; decreases 
D)  increases; increases 
E)  does not change; does not change

Question 16

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. 
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.

Question 17

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; not 
A)  positively; positively 
B)  negatively; positively 
C)  negatively; negatively 
D)  positively; negatively 
E)  not; not

Question 18

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. 
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.

Question 19

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 IV 
A)  I and II 
B)  I and III 
C)  II and III 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 20

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 decreases 
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 decreases

Exam 21: Option Valuation

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

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

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

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

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

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

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

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

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

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

The elasticity of a stock put option is always

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

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

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

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

Relative to European puts, otherwise identical American put options

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?

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

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

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

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