Question 1

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following is the lowest possible value of an American call on a stock with no dividends?

Accepted Answer

A)  Max(0, S0 - X(1 + r)-T) 
B)  S0 
C)  Max(0, S0 - X) 
D)  Max(0, S0 (1 + r)-T - X) 
E)  none of the above 
A)  Max(0, S0 - X(1 + r)-T) 
B)  S0 
C)  Max(0, S0 - X) 
D)  Max(0, S0 (1 + r)-T - X) 
E)  none of the above A

Question 3

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?

Accepted Answer

A)  C + P - X(1 + r)-T 
B)  C - S0 
C)  P - X 
D)  P + S0 - X(1 + r)-T 
E)  none of the above 
A)  C + P - X(1 + r)-T 
B)  C - S0 
C)  P - X 
D)  P + S0 - X(1 + r)-T 
E)  none of the above E

Question 4

The maximum value of a call is the stock price.

Accepted Answer

A) True 
 B)False

Question 5

The gain from the early exercise of an American put is X(1 + r)-T - S0.

Accepted Answer

A) True 
 B)False

Question 6

The maximum difference between the January 105 and 110 calls is which of the following?

Accepted Answer

A)  11.50 
B)  4.92 
C)  5.00 
D)  4.0 
E)  none of the above 
A)  11.50 
B)  4.92 
C)  5.00 
D)  4.0 
E)  none of the above

Question 7

The effect of volatility on a call/put's price is

Accepted Answer

A)  decreased price due to decreased possible losses 
B)  nominal volatility will not noticeably effect a call/put's price 
C)  increased price due to increased possible gains 
D)  decreased price due to increased possible losses 
E)  none of the above 
A)  decreased price due to decreased possible losses 
B)  nominal volatility will not noticeably effect a call/put's price 
C)  increased price due to increased possible gains 
D)  decreased price due to increased possible losses 
E)  none of the above

Question 8

If one portfolio always provides a return at least as high as another portfolio, then that portfolio will have a price no less than that of the other portfolio.

Accepted Answer

A) True 
 B)False

Question 9

An American put might be exercised early even when there are no dividends on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 10

What is the lowest possible value of a European put?

Accepted Answer

A)  Max(0, X - S0) 
B)  X(1 + r)-T 
C)  Max[0, S0 - X(1 + r)-T] 
D)  Max[0, X(1 + r)-T - S0)] 
E)  none of the above 
A)  Max(0, X - S0) 
B)  X(1 + r)-T 
C)  Max[0, S0 - X(1 + r)-T] 
D)  Max[0, X(1 + r)-T - S0)] 
E)  none of the above

Question 11

Holding everything else constant, put options are more expensive in periods of high interest rates.

Accepted Answer

A) True 
 B)False

Question 12

An American call on a non-dividend paying stock will be worth more than a European call on that same stock.

Accepted Answer

A) True 
 B)False

Question 13

The spread between the prices of two European puts, alike in all respects except exercise price, cannot exceed the difference in their exercise prices.

Accepted Answer

A) True 
 B)False

Question 14

What is the intrinsic value of the November 105 put?

Accepted Answer

A)  0.30 
B)  8.25 
C)  8.50 
D)  0.00 
E)  none of the above 
A)  0.30 
B)  8.25 
C)  8.50 
D)  0.00 
E)  none of the above

Question 15

What is the time value of the December 105 put?

Accepted Answer

A)  1.30 
B)  8.30 
C)  0.00 
D)  7.00 
E)  none of the above 
A)  1.30 
B)  8.30 
C)  0.00 
D)  7.00 
E)  none of the above

Question 16

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

Accepted Answer

A) True 
 B)False

Question 17

The time value of a call is greatest when the stock price is very high.

Accepted Answer

A) True 
 B)False

Question 18

At expiration, the value of a European call is ST - X.

Accepted Answer

A) True 
 B)False

Question 19

What is the time value of the November 110 call?

Accepted Answer

A)  0.00 
B)  4.40 
C)  1.15 
D)  3.25 
E)  none of the above 
A)  0.00 
B)  4.40 
C)  1.15 
D)  3.25 
E)  none of the above

Question 20

Another expression for intrinsic value is

Accepted Answer

A)  parity 
B)  parity value 
C)  exercise value 
D)  all of the above 
E)  none of the above 
A)  parity 
B)  parity value 
C)  exercise value 
D)  all of the above 
E)  none of the above

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

Which of the following is the lowest possible value of an American call on a stock with no dividends?

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S₀, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?

The maximum value of a call is the stock price.

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.

The maximum difference between the January 105 and 110 calls is which of the following?

The effect of volatility on a call/put's price is

If one portfolio always provides a return at least as high as another portfolio, then that portfolio will have a price no less than that of the other portfolio.

An American put might be exercised early even when there are no dividends on the underlying stock.

What is the lowest possible value of a European put?

Holding everything else constant, put options are more expensive in periods of high interest rates.

An American call on a non-dividend paying stock will be worth more than a European call on that same stock.

The spread between the prices of two European puts, alike in all respects except exercise price, cannot exceed the difference in their exercise prices.

What is the intrinsic value of the November 105 put?

What is the time value of the December 105 put?

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

The time value of a call is greatest when the stock price is very high.

At expiration, the value of a European call is S_T - X.

What is the time value of the November 110 call?

Another expression for intrinsic value is

Introduction

Structure of Options Markets

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 3: Principles of Option Pricing

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

Which of the following is the lowest possible value of an American call on a stock with no dividends?

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?

The maximum value of a call is the stock price.

The gain from the early exercise of an American put is X(1 + r)-T - S0.

The maximum difference between the January 105 and 110 calls is which of the following?

The effect of volatility on a call/put's price is

If one portfolio always provides a return at least as high as another portfolio, then that portfolio will have a price no less than that of the other portfolio.

An American put might be exercised early even when there are no dividends on the underlying stock.

What is the lowest possible value of a European put?

Holding everything else constant, put options are more expensive in periods of high interest rates.

An American call on a non-dividend paying stock will be worth more than a European call on that same stock.

The spread between the prices of two European puts, alike in all respects except exercise price, cannot exceed the difference in their exercise prices.

What is the intrinsic value of the November 105 put?

What is the time value of the December 105 put?

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

The time value of a call is greatest when the stock price is very high.

At expiration, the value of a European call is ST - X.

What is the time value of the November 110 call?

Another expression for intrinsic value is

Introduction

Structure of Options Markets

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S₀, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.

At expiration, the value of a European call is S_T - X.