Question 1

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Accepted Answer

A)  long 0.70 calls for each short stock. 
B)  short 0.70 calls for each long stock. 
C)  long 0.70 shares for each short call. 
D)  long 0.70 shares for each long call. 
E)  none of these. 
A)  long 0.70 calls for each short stock. 
B)  short 0.70 calls for each long stock. 
C)  long 0.70 shares for each short call. 
D)  long 0.70 shares for each long call. 
E)  none of these.

Question 2

Options sellers who are delta-hedging would most likely

Accepted Answer

A)  sell when markets are falling 
B)  buy when markets are rising 
C)  both a and b. 
D)  sell whether markets are falling or rising. 
E)  buy whether markets are falling or rising. 
A)  sell when markets are falling 
B)  buy when markets are rising 
C)  both a and b. 
D)  sell whether markets are falling or rising. 
E)  buy whether markets are falling or rising.

Question 3

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

Accepted Answer

A)  portfolio insurance. 
B)  rebalancing. 
C)  option elasticity. 
D)  gamma hedging. 
E)  dynamic hedging. 
A)  portfolio insurance. 
B)  rebalancing. 
C)  option elasticity. 
D)  gamma hedging. 
E)  dynamic hedging.

Question 4

A put option on the S&P 500 index will best protect ________

Accepted Answer

A)  a portfolio of 100 shares of IBM stock. 
B)  a portfolio of 50 bonds. 
C)  a portfolio that corresponds to the S&P 500. 
D)  a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks. 
E)  a portfolio that replicates the Dow. 
A)  a portfolio of 100 shares of IBM stock. 
B)  a portfolio of 50 bonds. 
C)  a portfolio that corresponds to the S&P 500. 
D)  a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks. 
E)  a portfolio that replicates the Dow.

Question 5

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)  a and c. 
E)  a,b,and c. 
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)  a and c. 
E)  a,b,and c.

Question 6

Prior to expiration

Accepted Answer

A)  the intrinsic value of a call option is greater than its actual value. 
B)  the intrinsic value of a call option is always positive. 
C)  the actual value of call option is greater than the intrinsic value. 
D)  the intrinsic value of a call option is always greater than its time value. 
E)  none of these. 
A)  the intrinsic value of a call option is greater than its actual value. 
B)  the intrinsic value of a call option is always positive. 
C)  the actual value of call option is greater than the intrinsic value. 
D)  the intrinsic value of a call option is always greater than its time value. 
E)  none of these.

Question 7

As the underlying stock's price increased,the call option valuation function's slope approaches

Accepted Answer

A)  zero. 
B)  one. 
C)  two times the value of the stock. 
D)  one-half time s the value of the stock. 
E)  infinity 
A)  zero. 
B)  one. 
C)  two times the value of the stock. 
D)  one-half time s the value of the stock. 
E)  infinity

Question 8

The elasticity of a stock call option is always

Accepted Answer

A)  greater than one. 
B)  smaller than one. 
C)  negative. 
D)  infinite. 
E)  none of these. 
A)  greater than one. 
B)  smaller than one. 
C)  negative. 
D)  infinite. 
E)  none of these.

Question 9

The Black-Scholes formula assumes that
I.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 II 
D)  I,II and IV 
E)  I,II,III,and IV 
A)  I and II 
B)  I and III 
C)  II and II 
D)  I,II and IV 
E)  I,II,III,and IV

Question 10

If the hedge ratio for a stock call is 0.70,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)  -.17 
A)  0.70 
B)  0.30 
C)  -0.70 
D)  -0.30 
E)  -.17

Question 11

In volatile markets,dynamic hedging may be difficult to implement because

Accepted Answer

A)  prices move too quickly for effective rebalancing. 
B)  as volatility increases,historical deltas are too low. 
C)  price quotes may be delayed so that correct hedge ratios cannot be computed. 
D)  volatile markets may cause trading halts. 
E)  all of these. 
A)  prices move too quickly for effective rebalancing. 
B)  as volatility increases,historical deltas are too low. 
C)  price quotes may be delayed so that correct hedge ratios cannot be computed. 
D)  volatile markets may cause trading halts. 
E)  all of these.

Question 12

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

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)  none of these. 
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)  none of these.

Question 13

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

Accepted Answer

The volatility of the underlying stock i

Question 14

A hedge ratio for a call is always

Accepted Answer

A)  equal to one. 
B)  greater than one. 
C)  between zero and one 
D)  between minus one and zero. 
E)  of no restricted value 
A)  equal to one. 
B)  greater than one. 
C)  between zero and one 
D)  between minus one and zero. 
E)  of no restricted value

Question 15

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A)  0.60 
B)  0.40 
C)  -0.60 
D)  -0.40 
E)  -.17 
A)  0.60 
B)  0.40 
C)  -0.60 
D)  -0.40 
E)  -.17

Question 16

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking 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 17

An American call option buyer on a non-dividend paying stock will

Accepted Answer

A)  always exercise the call as soon as it is in the money. 
B)  only exercise the call when the stock price exceeds the previous high 
C)  never exercise the call early. 
D)  buy an offsetting put whenever the stock price drops below the strike price. 
E)  none of these. 
A)  always exercise the call as soon as it is in the money. 
B)  only exercise the call when the stock price exceeds the previous high 
C)  never exercise the call early. 
D)  buy an offsetting put whenever the stock price drops below the strike price. 
E)  none of these.

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Options sellers who are delta-hedging would most likely

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

A put option on the S&P 500 index will best protect ________

Empirical tests of the Black-Scholes option pricing model

Prior to expiration

As the underlying stock's price increased,the call option valuation function's slope approaches

The elasticity of a stock call option is always

If the hedge ratio for a stock call is 0.70,the hedge ratio for a put with the same expiration date and exercise price as the call would be ______.

In volatile markets,dynamic hedging may be difficult to implement because

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

A hedge ratio for a call is always

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

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

An American call option buyer on a non-dividend paying stock will

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Exam 18: Performance Evaluation and Active Portfolio Management

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Options sellers who are delta-hedging would most likely

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

A put option on the S&P 500 index will best protect ________

Empirical tests of the Black-Scholes option pricing model

Prior to expiration

As the underlying stock's price increased,the call option valuation function's slope approaches

The elasticity of a stock call option is always

If the hedge ratio for a stock call is 0.70,the hedge ratio for a put with the same expiration date and exercise price as the call would be ______.

In volatile markets,dynamic hedging may be difficult to implement because

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

A hedge ratio for a call is always

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

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

An American call option buyer on a non-dividend paying stock will

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

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