Question 1

Which of the following is NOT true?

Accepted Answer

A) An American put option is always worth less than the present value of the strike price 
B) A European put option is always worth less than the present value of the strike price 
C) A European call option is always worth less than the stock price 
D) An American call option is always worth less than the stock price 
A) An American put option is always worth less than the present value of the strike price 
B) A European put option is always worth less than the present value of the strike price 
C) A European call option is always worth less than the stock price 
D) An American call option is always worth less than the stock price A

Question 2

A European call and a European put on a stock have the same strike price and time to maturity.At 10:00am on a certain day,the price of the call is $3 and the price of the put is $4.At 10:01am news reaches the market that has no effect on the stock price or interest rates,but increases volatilities.As a result the price of the call changes to $4.50.Which of the following is correct?

Accepted Answer

A) The put price increases to $6.00 
B) The put price decreases to $2.00 
C) The put price increases to $5.50 
D) It is possible that there is no effect on the price 
A) The put price increases to $6.00 
B) The put price decreases to $2.00 
C) The put price increases to $5.50 
D) It is possible that there is no effect on the price C

Question 3

Which of the following is the put-call parity result for a non-dividend-paying stock?

Accepted Answer

A) The European put price plus the European call price must equal the stock price plus the present value of the strike price 
B) The European put price plus the present value of the strike price must equal the European call price plus the stock price 
C) The European put price plus the stock price must equal the European call price plus the strike price 
D) The European put price plus the stock price must equal the European call price plus the present value of the strike price 
A) The European put price plus the European call price must equal the stock price plus the present value of the strike price 
B) The European put price plus the present value of the strike price must equal the European call price plus the stock price 
C) The European put price plus the stock price must equal the European call price plus the strike price 
D) The European put price plus the stock price must equal the European call price plus the present value of the strike price D

Question 4

Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?

Accepted Answer

A) Expected dividends increase 
B) Interest rates decrease 
C) The stock price volatility decreases 
D) All of the above 
A) Expected dividends increase 
B) Interest rates decrease 
C) The stock price volatility decreases 
D) All of the above

Question 5

Interest rates are zero.A European call with a strike price of $50 and a maturity of one year is worth $6.A European put with a strike price of $50 and a maturity of one year is worth $7.The current stock price is $49.Which of the following is true?

Accepted Answer

A) The call price is high relative to the put price 
B) The put price is high relative to the call price 
C) Both the call and put must be mispriced 
D) None of the above 
A) The call price is high relative to the put price 
B) The put price is high relative to the call price 
C) Both the call and put must be mispriced 
D) None of the above

Question 6

When the strike price increases with all else remaining the same,which of the following is true?

Accepted Answer

A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value 
A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value

Question 7

When the time to maturity increases with all else remaining the same,which of the following is true?

Accepted Answer

A) European options always increase in value 
B) The value of European options either stays the same or increases 
C) There is no effect on European option values 
D) European options are liable to increase or decrease in value 
A) European options always increase in value 
B) The value of European options either stays the same or increases 
C) There is no effect on European option values 
D) European options are liable to increase or decrease in value

Question 8

A stock price (which pays no dividends)is $50 and the strike price of a two year European put option is $54.The risk-free rate is 3% (continuously compounded).Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

Accepted Answer

A) $4.00 
B) $3.86 
C) $2.86 
D) $0.86 
A) $4.00 
B) $3.86 
C) $2.86 
D) $0.86

Question 9

The price of a European call option on a stock with a strike price of $50 is $6.The stock price is $51,the continuously compounded risk-free rate (all maturities)is 6% and the time to maturity is one year.A dividend of $1 is expected in six months.What is the price of a one-year European put option on the stock with a strike price of $50?

Accepted Answer

A) $8.97 
B) $6.97 
C) $3.06 
D) $1.12 
A) $8.97 
B) $6.97 
C) $3.06 
D) $1.12

Question 10

When the stock price increases with all else remaining the same,which of the following is true?

Accepted Answer

A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value 
A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value

Question 11

When dividends increases with all else remaining the same,which of the following is true?

Accepted Answer

A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value 
A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value

Question 12

Which of the following best describes the intrinsic value of an option?

Accepted Answer

A) The value it would have if the owner were forced to exercise immediately 
B) The Black-Scholes-Merton price of the option 
C) The lower bound for the option's price 
D) The amount paid for the option 
A) The value it would have if the owner were forced to exercise immediately 
B) The Black-Scholes-Merton price of the option 
C) The lower bound for the option's price 
D) The amount paid for the option

Question 13

Which of the following can be used to create a long position in a European put option on a stock?

Accepted Answer

A) Buy a call option on the stock and buy the stock 
B) Buy a call on the stock and short the stock 
C) Sell a call option on the stock and buy the stock 
D) Sell a call option on the stock and sell the stock 
A) Buy a call option on the stock and buy the stock 
B) Buy a call on the stock and short the stock 
C) Sell a call option on the stock and buy the stock 
D) Sell a call option on the stock and sell the stock

Question 14

Which of the following is true for American options?

Accepted Answer

A) Put-call parity provides an upper and lower bound for the difference between call and put prices 
B) Put call parity provides an upper bound but no lower bound for the difference between call and put prices 
C) Put call parity provides an lower bound but no upper bound for the difference between call and put prices 
D) There are no put-call parity results 
A) Put-call parity provides an upper and lower bound for the difference between call and put prices 
B) Put call parity provides an upper bound but no lower bound for the difference between call and put prices 
C) Put call parity provides an lower bound but no upper bound for the difference between call and put prices 
D) There are no put-call parity results

Question 15

When volatility increases with all else remaining the same,which of the following is true?

Accepted Answer

A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value 
A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value

Question 16

Which of the following is true when dividends are expected?

Accepted Answer

A) Put-call parity does not hold 
B) The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price 
C) The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price 
D) The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate 
A) Put-call parity does not hold 
B) The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price 
C) The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price 
D) The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate

Question 17

The price of a stock,which pays no dividends,is $30 and the strike price of a one year European call option on the stock is $25.The risk-free rate is 4% (continuously compounded).Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

Accepted Answer

A) $5.00 
B) $5.98 
C) $4.98 
D) $3.98 
A) $5.00 
B) $5.98 
C) $4.98 
D) $3.98

Question 18

When interest rates increase with all else remaining the same,which of the following is true?

Accepted Answer

A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value 
A) Both calls and puts increase in value 
B) Both calls and puts decrease in value 
C) Calls increase in value while puts decrease in value 
D) Puts increase in value while calls decrease in value

Question 19

Which of the following is true?

Accepted Answer

A) An American call option on a stock should never be exercised early 
B) An American call option on a stock should never be exercised early when no dividends are expected 
C) There is always some chance that an American call option on a stock will be exercised early 
D) There is always some chance that an American call option on a stock will be exercised early when no dividends are expected 
A) An American call option on a stock should never be exercised early 
B) An American call option on a stock should never be exercised early when no dividends are expected 
C) There is always some chance that an American call option on a stock will be exercised early 
D) There is always some chance that an American call option on a stock will be exercised early when no dividends are expected

Question 20

The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6.The stock price is $51,the continuously compounded risk-free rate (all maturities)is 6% and the time to maturity is one year.What is the price of a one-year European put option on the stock with a strike price of $50?

Accepted Answer

A) $9.91 
B) $7.00 
C) $6.00 
D) $2.09 
A) $9.91 
B) $7.00 
C) $6.00 
D) $2.09

Which of the following is NOT true?

Which of the following is the put-call parity result for a non-dividend-paying stock?

Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?

Interest rates are zero.A European call with a strike price of $50 and a maturity of one year is worth $6.A European put with a strike price of $50 and a maturity of one year is worth $7.The current stock price is $49.Which of the following is true?

When the strike price increases with all else remaining the same,which of the following is true?

When the time to maturity increases with all else remaining the same,which of the following is true?

When the stock price increases with all else remaining the same,which of the following is true?

When dividends increases with all else remaining the same,which of the following is true?

Which of the following best describes the intrinsic value of an option?

Which of the following can be used to create a long position in a European put option on a stock?

Which of the following is true for American options?

When volatility increases with all else remaining the same,which of the following is true?

Which of the following is true when dividends are expected?

When interest rates increase with all else remaining the same,which of the following is true?

Which of the following is true?

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: The BSM Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

Filters

Exam 10: Properties of Stock Options

Which of the following is NOT true?

Which of the following is the put-call parity result for a non-dividend-paying stock?

Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?

Interest rates are zero.A European call with a strike price of $50 and a maturity of one year is worth $6.A European put with a strike price of $50 and a maturity of one year is worth $7.The current stock price is $49.Which of the following is true?

When the strike price increases with all else remaining the same,which of the following is true?

When the time to maturity increases with all else remaining the same,which of the following is true?

When the stock price increases with all else remaining the same,which of the following is true?

When dividends increases with all else remaining the same,which of the following is true?

Which of the following best describes the intrinsic value of an option?

Which of the following can be used to create a long position in a European put option on a stock?

Which of the following is true for American options?

When volatility increases with all else remaining the same,which of the following is true?

Which of the following is true when dividends are expected?

When interest rates increase with all else remaining the same,which of the following is true?

Which of the following is true?

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: The BSM Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

Filters