Question 1

What is the intrinsic value of the January 110 call?

Accepted Answer

A)  0.00 
B)  8.30 
C)  3.75 
D)  5.00 
E)  none of the above 
A)  0.00 
B)  8.30 
C)  3.75 
D)  5.00 
E)  none of the above

Question 2

The value of a European call is higher for lower strike prices.

Accepted Answer

A) True 
 B)False

Question 3

The put-call parity rule for American options is stated as equalities.

Accepted Answer

A) True 
 B)False

Question 4

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.
   The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-What is the intrinsic value of the December 115 put?

Accepted Answer

A)  1.75 
B)  0.00 
C)  3.90 
D)  3.00 
E)  none of the above 
A)  1.75 
B)  0.00 
C)  3.90 
D)  3.00 
E)  none of the above

Question 5

The difference between a Treasury bill's face value and its price is called the

Accepted Answer

A)  time value 
B)  discount 
C)  coupon rate 
D)  bid 
E)  none of the above 
A)  time value 
B)  discount 
C)  coupon rate 
D)  bid 
E)  none of the above

Question 6

The price of a call option is directly related to interest rates.

Accepted Answer

A) True 
 B)False

Question 7

The lower the exercise price, the more valuable the call option.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following inequalities correctly states the relationship between the difference in the prices of two European calls that differ only by exercise price

Accepted Answer

A)  (X2? - X1)(1 + r)-T ≥ Ce(S0,T,X1) - Ce(S0,T,X2) 
B)  (X2? - X1) ≥ Ce(S0,T,X2) - Ce(S0,T,X1) 
C)  (X2 - X1)(1 + r)-T ≥ Ce(S0,T,X1) + Ce(S0,T,X2) 
D)  (X2? - X1) ≥ Ce(S0,T,X1) - Ce(S0,T,X2) 
E)  none of the above 
A)  (X2? - X1)(1 + r)-T ≥ Ce(S0,T,X1) - Ce(S0,T,X2) 
B)  (X2? - X1) ≥ Ce(S0,T,X2) - Ce(S0,T,X1) 
C)  (X2 - X1)(1 + r)-T ≥ Ce(S0,T,X1) + Ce(S0,T,X2) 
D)  (X2? - X1) ≥ Ce(S0,T,X1) - Ce(S0,T,X2) 
E)  none of the above

Question 9

What is the time value of the November 115 put?

Accepted Answer

A)  1.75 
B)  2.80 
C)  1.10 
D)  0.00 
E)  none of the above 
A)  1.75 
B)  2.80 
C)  1.10 
D)  0.00 
E)  none of the above

Question 10

What is the time value of the January 115 call?

Accepted Answer

A)  5.30 
B)  0.00 
C)  3.50 
D)  1.70 
E)  none of the above 
A)  5.30 
B)  0.00 
C)  3.50 
D)  1.70 
E)  none of the above

Question 11

Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the market price of the call to be less than the price given by put-call parity. Ignoring transaction costs, what trades should you do?

Accepted Answer

A)  buy the call and the risk-free bonds and sell the put and the stock 
B)  buy the stock and the risk-free bonds and sell the put and the call 
C)  buy the put and the stock and sell the risk-free bonds and the call 
D)  buy the put and the call and sell the risk-free bonds and the stock 
E)  none of the above 
A)  buy the call and the risk-free bonds and sell the put and the stock 
B)  buy the stock and the risk-free bonds and sell the put and the call 
C)  buy the put and the stock and sell the risk-free bonds and the call 
D)  buy the put and the call and sell the risk-free bonds and the stock 
E)  none of the above

Question 12

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

Accepted Answer

A) True 
 B)False

Question 13

The difference between two American put options with different strike prices is less than or equal to the dollar difference between the strike prices, the higher strike price minus the lower strike price.

Accepted Answer

A) True 
 B)False

Question 14

A stock is equivalent to a long call, short put and long risk-free bond.

Accepted Answer

A) True 
 B)False

Question 15

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

Accepted Answer

A) True 
 B)False

Question 16

A situation in which early exercise of an American put can be justified is

Accepted Answer

A)  bankruptcy 
B)  merger 
C)  if X exceeds S0 by greater than any transaction costs. 
D)  both a and b 
E)  both a and b and c 
A)  bankruptcy 
B)  merger 
C)  if X exceeds S0 by greater than any transaction costs. 
D)  both a and b 
E)  both a and b and c

Question 17

Even if there are no dividends on the stock, American put-call parity will not be the same as European put-call parity.

Accepted Answer

A) True 
 B)False

Question 18

The time value of an option is also referred to as the

Accepted Answer

A)  synthetic value 
B)  strike value 
C)  speculative value 
D)  parity value 
E)  none of the above 
A)  synthetic value 
B)  strike value 
C)  speculative value 
D)  parity value 
E)  none of the above

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Given a longer-lived American call and a shorter-lived American call with the same terms, the longer-lived call must always be worth

Accepted Answer

A)  at most the value of the shorter-lived call 
B)  at least as much as the shorter-lived call 
C)  exactly the same as the shorter-lived call 
D)  the shorter-lived call discounted to the length of the longer-lived call 
E)  none of the above 
A)  at most the value of the shorter-lived call 
B)  at least as much as the shorter-lived call 
C)  exactly the same as the shorter-lived call 
D)  the shorter-lived call discounted to the length of the longer-lived call 
E)  none of the above

What is the intrinsic value of the January 110 call?

The value of a European call is higher for lower strike prices.

The put-call parity rule for American options is stated as equalities.

The difference between a Treasury bill's face value and its price is called the

The price of a call option is directly related to interest rates.

The lower the exercise price, the more valuable the call option.

Which of the following inequalities correctly states the relationship between the difference in the prices of two European calls that differ only by exercise price

What is the time value of the November 115 put?

What is the time value of the January 115 call?

Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the market price of the call to be less than the price given by put-call parity. Ignoring transaction costs, what trades should you do?

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

The difference between two American put options with different strike prices is less than or equal to the dollar difference between the strike prices, the higher strike price minus the lower strike price.

A stock is equivalent to a long call, short put and long risk-free bond.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

A situation in which early exercise of an American put can be justified is

Even if there are no dividends on the stock, American put-call parity will not be the same as European put-call parity.

The time value of an option is also referred to as the

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

Given a longer-lived American call and a shorter-lived American call with the same terms, the longer-lived call must always be worth

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

What is the intrinsic value of the January 110 call?

The value of a European call is higher for lower strike prices.

The put-call parity rule for American options is stated as equalities.

The difference between a Treasury bill's face value and its price is called the

The price of a call option is directly related to interest rates.

The lower the exercise price, the more valuable the call option.

Which of the following inequalities correctly states the relationship between the difference in the prices of two European calls that differ only by exercise price

What is the time value of the November 115 put?

What is the time value of the January 115 call?

Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the market price of the call to be less than the price given by put-call parity. Ignoring transaction costs, what trades should you do?

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

The difference between two American put options with different strike prices is less than or equal to the dollar difference between the strike prices, the higher strike price minus the lower strike price.

A stock is equivalent to a long call, short put and long risk-free bond.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

A situation in which early exercise of an American put can be justified is

Even if there are no dividends on the stock, American put-call parity will not be the same as European put-call parity.

The time value of an option is also referred to as the

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

Given a longer-lived American call and a shorter-lived American call with the same terms, the longer-lived call must always be worth

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