Question 1

Which of the following statements about the binomial option pricing model is not always true?

Accepted Answer

A)  it can capture the effect of early exercise 
B)  it can accommodate a large number of possible stock prices at expiration 
C)  it reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration 
D)  it gives the price at which the option will trade in the market. 
E)  none of the above 
A)  it can capture the effect of early exercise 
B)  it can accommodate a large number of possible stock prices at expiration 
C)  it reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration 
D)  it gives the price at which the option will trade in the market. 
E)  none of the above

Question 2

A portfolio that combines the underlying stock and a short position in an option is called

Accepted Answer

A)  a risk arbitrage portfolio 
B)  a hedge portfolio 
C)  a ratio portfolio 
D)  a two-state portfolio 
E)  none of the above 
A)  a risk arbitrage portfolio 
B)  a hedge portfolio 
C)  a ratio portfolio 
D)  a two-state portfolio 
E)  none of the above

Question 3

The binomial option pricing formula is based on the weighted average of the next two possible values, discounted back to the present.

Accepted Answer

A) True 
 B)False

Question 4

A stock priced at 50 can go up or down by 10 percent over two periods. The risk-free rate is 4 percent. Which of the following is the correct price of an American put with an exercise price of 55?

Accepted Answer

A)  7.88 
B)  3.38 
C)  4.00 
D)  5.00 
E)  1.65 
A)  7.88 
B)  3.38 
C)  4.00 
D)  5.00 
E)  1.65

Question 5

When puts are priced with the binomial model, which of the following is true?

Accepted Answer

A)  the puts must be American 
B)  the puts cannot be properly hedged 
C)  the puts will violate put-call parity 
D)  the hedge ratio is one throughout the tree 
E)  none of the above 
A)  the puts must be American 
B)  the puts cannot be properly hedged 
C)  the puts will violate put-call parity 
D)  the hedge ratio is one throughout the tree 
E)  none of the above

Question 6

In a multiperiod binomial model, an arbitrage profit cannot be earned until the option expires.

Accepted Answer

A) True 
 B)False

Question 7

All of the following are practical applications of the binomial model except

Accepted Answer

A)  choices regarding real options 
B)  options regarding executive incentive plans 
C)  models in which the stock price can go up, down, or remain constant in the next period 
D)  embedded options within debt securities 
E)  none of the above 
A)  choices regarding real options 
B)  options regarding executive incentive plans 
C)  models in which the stock price can go up, down, or remain constant in the next period 
D)  embedded options within debt securities 
E)  none of the above

Question 8

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48. Use the model for u that does not require the risk-free rate.

Accepted Answer

A)  1.22 
B)  1.48 
C)  1.40 
D)  1.32 
E)  none of the above 
A)  1.22 
B)  1.48 
C)  1.40 
D)  1.32 
E)  none of the above

Question 9

If the stock pays a specific dollar dividend and the stock price, to include the dividend, follows the binomial up and down factors, which of the following will happen?

Accepted Answer

A)  the binomial tree will recombine 
B)  the binomial tree will not recombine 
C)  the option will be mispriced 
D)  an arbitrage profit will not be possible 
E)  none of the above 
A)  the binomial tree will recombine 
B)  the binomial tree will not recombine 
C)  the option will be mispriced 
D)  an arbitrage profit will not be possible 
E)  none of the above

Question 10

If the number of binomial periods is increased and u, d and r are not adjusted, the value of a European call will increase.

Accepted Answer

A) True 
 B)False

Question 11

The hedge ratio is the number of shares per call in a risk-free portfolio.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

Accepted Answer

A)  European calls and European puts 
B)  European calls and American puts 
C)  American puts and European puts 
D)  American puts and European calls 
E)  none of the above 
A)  European calls and European puts 
B)  European calls and American puts 
C)  American puts and European puts 
D)  American puts and European calls 
E)  none of the above

Question 13

In a non-recombining tree, the number of paths that will occur after three periods is

Accepted Answer

A)  three 
B)  four 
C)  ten 
D)  eight 
E)  six 
A)  three 
B)  four 
C)  ten 
D)  eight 
E)  six

Question 14

When pricing an American put with the binomial model, you must check for early exercise at each time point and stock price except the current one.

Accepted Answer

A) True 
 B)False

Question 15

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters, the binomial tree will recombine.

Accepted Answer

A) True 
 B)False

Question 16

What is the current value of the call?

Accepted Answer

A)  8.00 
B)  7.30 
C)  11.13 
D)  0.619 
E)  none of the above 
A)  8.00 
B)  7.30 
C)  11.13 
D)  0.619 
E)  none of the above

Question 17

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

Accepted Answer

A) True 
 B)False

Question 18

If a call is underpriced and you buy the call and sell short the stock, it is equivalent to investing money at more than the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 19

Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left in an American call's life. What will the option be worth?

Accepted Answer

A)  6.83 
B)  0.00 
C)  4.56 
D)  5.00 
E)  none of the above 
A)  6.83 
B)  0.00 
C)  4.56 
D)  5.00 
E)  none of the above

Question 20

All of the following are variables used to determine a call option's price except

Accepted Answer

A)  the risk-free rate 
B)  the probability of stock price movement 
C)  the exercise price 
D)  the possible future stock prices at expiration 
E)  none of the above 
A)  the risk-free rate 
B)  the probability of stock price movement 
C)  the exercise price 
D)  the possible future stock prices at expiration 
E)  none of the above

Which of the following statements about the binomial option pricing model is not always true?

A portfolio that combines the underlying stock and a short position in an option is called

The binomial option pricing formula is based on the weighted average of the next two possible values, discounted back to the present.

A stock priced at 50 can go up or down by 10 percent over two periods. The risk-free rate is 4 percent. Which of the following is the correct price of an American put with an exercise price of 55?

When puts are priced with the binomial model, which of the following is true?

In a multiperiod binomial model, an arbitrage profit cannot be earned until the option expires.

All of the following are practical applications of the binomial model except

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48. Use the model for u that does not require the risk-free rate.

If the stock pays a specific dollar dividend and the stock price, to include the dividend, follows the binomial up and down factors, which of the following will happen?

If the number of binomial periods is increased and u, d and r are not adjusted, the value of a European call will increase.

The hedge ratio is the number of shares per call in a risk-free portfolio.

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

In a non-recombining tree, the number of paths that will occur after three periods is

When pricing an American put with the binomial model, you must check for early exercise at each time point and stock price except the current one.

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters, the binomial tree will recombine.

What is the current value of the call?

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

If a call is underpriced and you buy the call and sell short the stock, it is equivalent to investing money at more than the risk-free rate.

Suppose S = 70, X = 65, r = 0.05, p = 0.6, C_u = 7.17, C_d = 1.22 and there is one period left in an American call's life. What will the option be worth?

All of the following are variables used to determine a call option's price except

Introduction

Structure of Options Markets

Principles of Option Pricing

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 4: Option Pricing Models: The Binomial Model

Which of the following statements about the binomial option pricing model is not always true?

A portfolio that combines the underlying stock and a short position in an option is called

The binomial option pricing formula is based on the weighted average of the next two possible values, discounted back to the present.

A stock priced at 50 can go up or down by 10 percent over two periods. The risk-free rate is 4 percent. Which of the following is the correct price of an American put with an exercise price of 55?

When puts are priced with the binomial model, which of the following is true?

In a multiperiod binomial model, an arbitrage profit cannot be earned until the option expires.

All of the following are practical applications of the binomial model except

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48. Use the model for u that does not require the risk-free rate.

If the stock pays a specific dollar dividend and the stock price, to include the dividend, follows the binomial up and down factors, which of the following will happen?

If the number of binomial periods is increased and u, d and r are not adjusted, the value of a European call will increase.

The hedge ratio is the number of shares per call in a risk-free portfolio.

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

In a non-recombining tree, the number of paths that will occur after three periods is

When pricing an American put with the binomial model, you must check for early exercise at each time point and stock price except the current one.

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters, the binomial tree will recombine.

What is the current value of the call?

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

If a call is underpriced and you buy the call and sell short the stock, it is equivalent to investing money at more than the risk-free rate.

Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left in an American call's life. What will the option be worth?

All of the following are variables used to determine a call option's price except

Introduction

Structure of Options Markets

Principles of Option Pricing

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 S = 70, X = 65, r = 0.05, p = 0.6, C_u = 7.17, C_d = 1.22 and there is one period left in an American call's life. What will the option be worth?