Question 1

At expiration the call price must converge to the stock price.

Accepted Answer

A) True 
 B)False

Question 2

Selling short a risk-free bond is equivalent to borrowing.

Accepted Answer

A) True 
 B)False

Question 3

What is the European lower bound of the December 105 call?

Accepted Answer

A)  9.86 
B)  0.00 
C)  8.25 
D)  9.26 
E)  none of the above 
A)  9.86 
B)  0.00 
C)  8.25 
D)  9.26 
E)  none of the above

Question 4

If an option portfolio generates a zero cash flow at expiration and a positive cash flow today, an arbitrage opportunity is available.

Accepted Answer

A) True 
 B)False

Question 5

From American put-call parity, what are the minimum and maximum values that the sum of the stock price and December 110 put price can be?

Accepted Answer

A)  101.81 and 102.87 
B)  2.50 and 113.25 
C)  116.038 and 117.10 
D)  7.125 and 110 
E)  none of the above 
A)  101.81 and 102.87 
B)  2.50 and 113.25 
C)  116.038 and 117.10 
D)  7.125 and 110 
E)  none of the above

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

Accepted Answer

A) True 
 B)False

Question 8

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced. Using put-call parity, what would you expect the stock price to be? For this problem, treat the options as if they were European.

Accepted Answer

A)  113.73 
B)  123.23 
C)  121.23 
D)  112.77 
E)  none of the above 
A)  113.73 
B)  123.23 
C)  121.23 
D)  112.77 
E)  none of the above

Question 9

Which of the following statements about an American call is not true?

Accepted Answer

A)  Its time value decreases as expiration approaches 
B)  Its maximum value is the stock price 
C)  It can be exercised prior to expiration 
D)  It pays dividends 
E)  none of the above 
A)  Its time value decreases as expiration approaches 
B)  Its maximum value is the stock price 
C)  It can be exercised prior to expiration 
D)  It pays dividends 
E)  none of the above

Question 10

Suppose that you observe a European option on a currency with an exchange rate of S0 and a foreign risk-free rate of F1F1F1S1F1F1F10. Which of the following inequalities correctly expresses the lower bound of the call?

Accepted Answer

A)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T + X(1 + r)-T] 
B)  Ce(S0,T,X) ≥ Max[0,S0  - X(1 + F1F1F1S1F1F1F10)-T] 
C)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T - X] 
D)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T - X(1 + r)-T] 
E)  none of the above 
A)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T + X(1 + r)-T] 
B)  Ce(S0,T,X) ≥ Max[0,S0  - X(1 + F1F1F1S1F1F1F10)-T] 
C)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T - X] 
D)  Ce(S0,T,X) ≥ Max[0,S0(1 + F1F1F1S1F1F1F10)-T - X(1 + r)-T] 
E)  none of the above

Question 11

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

Accepted Answer

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

Question 12

Transactions to exploit pricing errors in the put-call parity relationship are called conversions and reversals.

Accepted Answer

A) True 
 B)False

Question 13

What is the intrinsic value of the November 115 call?

Accepted Answer

A)  1.50 
B)  0.00 
C)  2.80 
D)  1.75 
E)  none of the above 
A)  1.50 
B)  0.00 
C)  2.80 
D)  1.75 
E)  none of the above

Question 14

On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?

Accepted Answer

A)  5.86 % 
B)  5.83 % 
C)  6.11 % 
D)  6.14 % 
E)  none of the above 
A)  5.86 % 
B)  5.83 % 
C)  6.11 % 
D)  6.14 % 
E)  none of the above

Question 15

Holding everything else constant, a longer-term European put is always worth more than a shorter-term European put.

Accepted Answer

A) True 
 B)False

Question 16

Suppose the stock is about to go ex-dividend in one day. The dividend will be $4.00. Which of the following calls will you consider for exercise?

Accepted Answer

A)  November 115 
B)  November 110 
C)  December 115 
D)  all of the above 
E)  none of the above 
A)  November 115 
B)  November 110 
C)  December 115 
D)  all of the above 
E)  none of the above

Question 17

What is the European lower bound of the November 115 call?

Accepted Answer

A)  1.44 
B)  0.00 
C)  1.75 
D)  2.06 
E)  none of the above 
A)  1.44 
B)  0.00 
C)  1.75 
D)  2.06 
E)  none of the above

Question 18

An American call should be exercised early when the stock price is extremely high and is expected to fall.

Accepted Answer

A) True 
 B)False

Question 19

If there are no dividends on a stock, which of the following statements is correct?

Accepted Answer

A)  An American call will sell for more than a European call 
B)  A European call will sell for more than an American call 
C)  An American call will be immediately exercised 
D)  An American call and an American put will sell for the same price 
E)  none of the above 
A)  An American call will sell for more than a European call 
B)  A European call will sell for more than an American call 
C)  An American call will be immediately exercised 
D)  An American call and an American put will sell for the same price 
E)  none of the above

Question 20

Put-call parity is a relationship that can be used to provide the price of both a European put and call simultaneously.

Accepted Answer

A) True 
 B)False

At expiration the call price must converge to the stock price.

Selling short a risk-free bond is equivalent to borrowing.

What is the European lower bound of the December 105 call?

If an option portfolio generates a zero cash flow at expiration and a positive cash flow today, an arbitrage opportunity is available.

From American put-call parity, what are the minimum and maximum values that the sum of the stock price and December 110 put price can be?

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

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced. Using put-call parity, what would you expect the stock price to be? For this problem, treat the options as if they were European.

Which of the following statements about an American call is not true?

Suppose that you observe a European option on a currency with an exchange rate of S₀ and a foreign risk-free rate of . Which of the following inequalities correctly expresses the lower bound of the call?

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

Transactions to exploit pricing errors in the put-call parity relationship are called conversions and reversals.

What is the intrinsic value of the November 115 call?

On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?

Holding everything else constant, a longer-term European put is always worth more than a shorter-term European put.

Suppose the stock is about to go ex-dividend in one day. The dividend will be $4.00. Which of the following calls will you consider for exercise?

What is the European lower bound of the November 115 call?

An American call should be exercised early when the stock price is extremely high and is expected to fall.

If there are no dividends on a stock, which of the following statements is correct?

Put-call parity is a relationship that can be used to provide the price of both a European put and call simultaneously.

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

At expiration the call price must converge to the stock price.

Selling short a risk-free bond is equivalent to borrowing.

What is the European lower bound of the December 105 call?

If an option portfolio generates a zero cash flow at expiration and a positive cash flow today, an arbitrage opportunity is available.

From American put-call parity, what are the minimum and maximum values that the sum of the stock price and December 110 put price can be?

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

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced. Using put-call parity, what would you expect the stock price to be? For this problem, treat the options as if they were European.

Which of the following statements about an American call is not true?

Suppose that you observe a European option on a currency with an exchange rate of S0 and a foreign risk-free rate of . Which of the following inequalities correctly expresses the lower bound of the call?

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

Transactions to exploit pricing errors in the put-call parity relationship are called conversions and reversals.

What is the intrinsic value of the November 115 call?

On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?

Holding everything else constant, a longer-term European put is always worth more than a shorter-term European put.

Suppose the stock is about to go ex-dividend in one day. The dividend will be $4.00. Which of the following calls will you consider for exercise?

What is the European lower bound of the November 115 call?

An American call should be exercised early when the stock price is extremely high and is expected to fall.

If there are no dividends on a stock, which of the following statements is correct?

Put-call parity is a relationship that can be used to provide the price of both a European put and call simultaneously.

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

Suppose that you observe a European option on a currency with an exchange rate of S₀ and a foreign risk-free rate of . Which of the following inequalities correctly expresses the lower bound of the call?