Question 1

Dynamic hedging is

Accepted Answer

A)  the volatility level for the stock that the option price implies. 
B)  the continued updating of the hedge ratio as time passes. 
C)  the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D)  the sensitivity of the delta to the stock price. 
A)  the volatility level for the stock that the option price implies. 
B)  the continued updating of the hedge ratio as time passes. 
C)  the percentage change in the stock call-option price divided by the percentage change in the stock price. 
D)  the sensitivity of the delta to the stock price. B

Question 2

A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

Accepted Answer

A)  +$700 
B)  +$500 
C)  −$580 
D)  −$520 
A)  +$700 
B)  +$500 
C)  −$580 
D)  −$520 D

Question 3

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. C

Question 4

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 the options are correct. 
A)  greater than one. 
B)  smaller than one. 
C)  negative. 
D)  infinite. 
E)  None of the options are correct.

Question 5

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. 
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.

Question 6

A call 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 7

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?

Accepted Answer

A)  $8 
B)  $12 
C)  $0 
D)  $4 
E)  Cannot be determined without more information 
A)  $8 
B)  $12 
C)  $0 
D)  $4 
E)  Cannot be determined without more information

Question 8

Other things equal, the price of a stock call option is negatively 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 9

Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies.

Accepted Answer

A)  negative; negative 
B)  positive; positive 
C)  positive; negative 
D)  negative; positive 
E)  zero; zero 
A)  negative; negative 
B)  positive; positive 
C)  positive; negative 
D)  negative; positive 
E)  zero; zero

Question 10

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 11

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

Accepted Answer

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

Question 12

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call?

Accepted Answer

A)  $12 
B)  $8 
C)  $0 
D)  $23 
A)  $12 
B)  $8 
C)  $0 
D)  $23

Question 13

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

Accepted Answer

A)  the call premium. 
B)  zero. 
C)  the stock price plus the exercise price. 
D)  the striking price. 
E)  None of the options are correct. 
A)  the call premium. 
B)  zero. 
C)  the stock price plus the exercise price. 
D)  the striking price. 
E)  None of the options are correct.

Question 14

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 15

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 the options are correct. 
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 the options are correct.

Question 16

An American call-option buyer on a nondividend-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 the options are correct. 
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 the options are correct.

Question 17

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 a call option is greater than the intrinsic value. 
D)  the intrinsic value of a call option is always greater than its time value. 
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 a call option is greater than the intrinsic value. 
D)  the intrinsic value of a call option is always greater than its time value.

Question 18

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 19

Delta is defined as

Accepted Answer

A)  the change in the value of an option for a dollar change in the price of the underlying asset. 
B)  the change in the value of the underlying asset for a dollar change in the call price. 
C)  the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D)  the change in the volatility of the underlying stock price. 
E)  None of the options are correct. 
A)  the change in the value of an option for a dollar change in the price of the underlying asset. 
B)  the change in the value of the underlying asset for a dollar change in the call price. 
C)  the percentage change in the value of an option for a 1% change in the value of the underlying asset. 
D)  the change in the volatility of the underlying stock price. 
E)  None of the options are correct.

Question 20

Which one of the following variables influences the value of call options? I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility

Accepted Answer

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

Exam 21: Option Valuation

Dynamic hedging is

A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

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 call option is always

All the inputs in the Black-Scholes option pricing model are directly observable except

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

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?

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

Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies.

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

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

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call?

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

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

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

An American call-option buyer on a nondividend-paying stock will

Prior to expiration,

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

Delta is defined as

Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

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

Optimal Risky Portfolios

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

Higher dividend-payout policies have a impact on the value of the call and a impact on the value of the put compared to lower dividend-payout policies.