Question 1

According to option pricing theory, a higher volatility would cause the put option premium to

Accepted Answer

A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur 
A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur A

Question 2

All of the following are assumptions of the Black-Scholes option pricing model except

Accepted Answer

A)  markets are efficient 
B)  no dividends 
C)  interest rates are constant 
D)  investors are generally bullish 
A)  markets are efficient 
B)  no dividends 
C)  interest rates are constant 
D)  investors are generally bullish D

Question 3

For at-the-money stock options, put/call parity requires that, for otherwise similar options

Accepted Answer

A)  puts sell for more than calls 
B)  puts sell for the same price as calls 
C)  puts sell for less than calls 
D)  puts sell for at least as much as calls 
A)  puts sell for more than calls 
B)  puts sell for the same price as calls 
C)  puts sell for less than calls 
D)  puts sell for at least as much as calls C

Question 4

The delta of a call option can be calculated as part of the Black-Scholes model since it is equal to

Accepted Answer

A)  N(d1) 
B)  N(d2) 
C)  Ke-rt 
D)  d2 
A)  N(d1) 
B)  N(d2) 
C)  Ke-rt 
D)  d2

Question 5

According to option pricing theory, a higher dividend payout would cause the call option premium to

Accepted Answer

A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur 
A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur

Question 6

If the stock price is 27, the strike price is 30, and the call premium is 2, the intrinsic value is

Accepted Answer

A)  -2 
B)  0 
C)  2 
D)  3 
A)  -2 
B)  0 
C)  2 
D)  3

Question 7

According to option pricing theory, a higher volatility would cause the call option premium to

Accepted Answer

A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur 
A)  increase 
B)  decrease 
C)  remain the same 
D)  any of the above can occur

Question 8

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the intrinsic value?

Accepted Answer

A)  0 
B)  3 
C)  4 
D)  7 
A)  0 
B)  3 
C)  4 
D)  7

Question 9

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the time value?

Accepted Answer

A)  0 
B)  3 
C)  4 
D)  7 
A)  0 
B)  3 
C)  4 
D)  7

Question 10

For most options, an individual investor views expiration day as the _____ of the month.

Accepted Answer

A)  first business day 
B)  second Tuesday 
C)  second Tuesday after the first Monday 
D)  third Friday 
A)  first business day 
B)  second Tuesday 
C)  second Tuesday after the first Monday 
D)  third Friday

Question 11

Option exercise is at the prerogative of the

Accepted Answer

A)  option writer 
B)  option buyer 
C)  either the option writer or the option buyer 
D)  Options Clearing Corporation 
A)  option writer 
B)  option buyer 
C)  either the option writer or the option buyer 
D)  Options Clearing Corporation

Question 12

If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the intrinsic value?

Accepted Answer

A)  0 
B)  1 
C)  3 
D)  4 
A)  0 
B)  1 
C)  3 
D)  4

Question 13

A primary use of options in portfolio management is

Accepted Answer

A)  risk management 
B)  meeting statutory requirements 
C)  satisfying legal lists 
D)  estate taxes 
A)  risk management 
B)  meeting statutory requirements 
C)  satisfying legal lists 
D)  estate taxes

Question 14

If the stock price is 27, the strike price is 30, and the put premium is 5, the time value is

Accepted Answer

A)  -2 
B)  0 
C)  2 
D)  3 
A)  -2 
B)  0 
C)  2 
D)  3

Question 15

The Options Clearing Corporation is most concerned with

Accepted Answer

A)  market risk 
B)  credit risk 
C)  interest rate risk 
D)  political risk 
A)  market risk 
B)  credit risk 
C)  interest rate risk 
D)  political risk

Question 16

Which of the following is correct?

Accepted Answer

A)  Intrinsic value - time value = option premium 
B)  Intrinsic value + time value = option premium 
C)  Intrinsic value = time value - option premium 
D)  Intrinsic value = time value + option premium 
A)  Intrinsic value - time value = option premium 
B)  Intrinsic value + time value = option premium 
C)  Intrinsic value = time value - option premium 
D)  Intrinsic value = time value + option premium

Question 17

The price of an option is called its

Accepted Answer

A)  time value 
B)  intrinsic value 
C)  premium 
D)  expiration value 
A)  time value 
B)  intrinsic value 
C)  premium 
D)  expiration value

Question 18

A person holds 2 XYZ APR 60 calls. What is their holding after a 2 for 1 stock split?

Accepted Answer

A)  2 XYZ APR 60 calls 
B)  4 XYZ APR 30 calls 
C)  2 XYZ APR 30 calls 
D)  4 XYZ APR 60 calls 
A)  2 XYZ APR 60 calls 
B)  4 XYZ APR 30 calls 
C)  2 XYZ APR 30 calls 
D)  4 XYZ APR 60 calls

Question 19

The most common use of options by individuals is

Accepted Answer

A)  tax avoidance 
B)  income generation 
C)  arbitrage 
D)  diversification 
A)  tax avoidance 
B)  income generation 
C)  arbitrage 
D)  diversification

Question 20

The delta for a put option will always satisfy which of the following conditions?

Accepted Answer

A)  -1 p p p p < 0 
A)  -1 p p p p < 0

Exam 17: Principles of Options and Option Pricing

According to option pricing theory, a higher volatility would cause the put option premium to

All of the following are assumptions of the Black-Scholes option pricing model except

For at-the-money stock options, put/call parity requires that, for otherwise similar options

The delta of a call option can be calculated as part of the Black-Scholes model since it is equal to

According to option pricing theory, a higher dividend payout would cause the call option premium to

If the stock price is 27, the strike price is 30, and the call premium is 2, the intrinsic value is

According to option pricing theory, a higher volatility would cause the call option premium to

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the intrinsic value?

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the time value?

For most options, an individual investor views expiration day as the _____ of the month.

Option exercise is at the prerogative of the

If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the intrinsic value?

A primary use of options in portfolio management is

If the stock price is 27, the strike price is 30, and the put premium is 5, the time value is

The Options Clearing Corporation is most concerned with

Which of the following is correct?

The price of an option is called its

A person holds 2 XYZ APR 60 calls. What is their holding after a 2 for 1 stock split?

The most common use of options by individuals is

The delta for a put option will always satisfy which of the following conditions?

The Process of Portfolio Management

Valuation, Risk, Return, and Uncertainty

Setting Portfolio Objectives

Investment Policy

The Mathematics of Diversification

Why Diversification Is a Good Idea

International Investment and Diversification

The Capital Markets and Market Efficiency

Picking the Equity Players

Equity Valuation Tools

Security Screening

Bond Pricing and Selection

The Role of Real Assets

Alternative Assets

Revision of the Equity Portfolio

Revision of the Fixed-Income Portfolio

Option Overwriting

Performance Evaluation

Fiduciary Duties and Responsibilities

Principles of the Futures Market

Benching the Equity Players

Removing Interest Rate Risk

Integrating Derivative Assets and Portfolio Management

Contemporary Issues in Portfolio Management

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