Question 1

The time to expiration of an option is based on a 360-day year.

Accepted Answer

A) True 
 B)False  False

Question 2

The price of a put on the stock is: (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

Accepted Answer

A)  0.85 
B)  8.64 
C)  2.35 
D)  4.88 
E)  none of the above 
A)  0.85 
B)  8.64 
C)  2.35 
D)  4.88 
E)  none of the above A

Question 3

The values of N(d1) and N(d2) are called risk neutral probabilities.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following statements about the Black-Scholes-Merton model is not true?

Accepted Answer

A)  decreasing the volatility lowers the call price 
B)  the expected stock price plays a role in the model 
C)  the risk-free rate is continuously compounded 
D)  the model is consistent with put-call parity 
E)  none of the above 
A)  decreasing the volatility lowers the call price 
B)  the expected stock price plays a role in the model 
C)  the risk-free rate is continuously compounded 
D)  the model is consistent with put-call parity 
E)  none of the above

Question 5

If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be

Accepted Answer

A)  higher than 0.28 
B)  lower than 0.28 
C)  0.28 
D)  lower than the risk-free rate 
E)  none of the above 
A)  higher than 0.28 
B)  lower than 0.28 
C)  0.28 
D)  lower than the risk-free rate 
E)  none of the above

Question 6

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

Accepted Answer

A)  delta 
B)  gamma 
C)  rho 
D)  theta 
E)  sigma 
A)  delta 
B)  gamma 
C)  rho 
D)  theta 
E)  sigma

Question 7

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

Accepted Answer

A) True 
 B)False

Question 8

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

Accepted Answer

A) True 
 B)False

Question 9

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

Accepted Answer

A) True 
 B)False

Question 10

The Black-Scholes-Merton model is the best model for valuing all types of options.

Accepted Answer

A) True 
 B)False

Question 11

If we now assume that the stock pays a dividend at a known constant rate of 3.5 percent, what stock price should we use in the model? (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

Accepted Answer

A)  22.60 
B)  19.65 
C)  23.00 
D)  21.99 
E)  none of the above 
A)  22.60 
B)  19.65 
C)  23.00 
D)  21.99 
E)  none of the above

Question 12

A riskless hedge requires more shares of stock than call options.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is incorrect about the historical volatility?

Accepted Answer

A)  if used in the Black-Scholes-Merton model, it gives the current market price 
B)  it is based on the volatility of the log return on the stock 
C)  it requires a sample of recent returns 
D)  it should be converted to an annualized volatility 
E)  none of the above 
A)  if used in the Black-Scholes-Merton model, it gives the current market price 
B)  it is based on the volatility of the log return on the stock 
C)  it requires a sample of recent returns 
D)  it should be converted to an annualized volatility 
E)  none of the above

Question 14

The Black-Scholes-Merton option price is relatively insensitive to changes in the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 15

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

Accepted Answer

A) True 
 B)False

Question 16

The option's sensitivity to an interest rate change is called rho.

Accepted Answer

A) True 
 B)False

Question 17

The relationship between the option price and the exercise price is called

Accepted Answer

A)  the gamma 
B)  the vega 
C)  the omega 
D)  the zeta 
E)  none of the above 
A)  the gamma 
B)  the vega 
C)  the omega 
D)  the zeta 
E)  none of the above

Question 18

One of the variables that influences the price of the option is the expected return on the stock.

Accepted Answer

A) True 
 B)False

Question 19

What happens when the volatility is zero in the Black-Scholes-Merton model?

Accepted Answer

A)  the option price converges to either zero or the lower bound 
B)  the option price converges to the intrinsic value 
C)  the option automatically expires out of the money 
D)  the gamma and delta converge 
E)  none of the above 
A)  the option price converges to either zero or the lower bound 
B)  the option price converges to the intrinsic value 
C)  the option automatically expires out of the money 
D)  the gamma and delta converge 
E)  none of the above

Question 20

If the actual call price is 3.79, the implied standard deviation is

Accepted Answer

A)  0.25 
B)  greater than 0.25 
C)  less than 0.25 
D)  infinite 
E)  none of the above 
A)  0.25 
B)  greater than 0.25 
C)  less than 0.25 
D)  infinite 
E)  none of the above

The time to expiration of an option is based on a 360-day year.

The price of a put on the stock is: (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

The values of N(d₁) and N(d₂) are called risk neutral probabilities.

Which of the following statements about the Black-Scholes-Merton model is not true?

If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

The Black-Scholes-Merton model is the best model for valuing all types of options.

A riskless hedge requires more shares of stock than call options.

Which of the following statements is incorrect about the historical volatility?

The Black-Scholes-Merton option price is relatively insensitive to changes in the risk-free rate.

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

The option's sensitivity to an interest rate change is called rho.

The relationship between the option price and the exercise price is called

One of the variables that influences the price of the option is the expected return on the stock.

What happens when the volatility is zero in the Black-Scholes-Merton model?

If the actual call price is 3.79, the implied standard deviation is

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial 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 5: Option Pricing Models: The Black-Scholes-Merton Model

The time to expiration of an option is based on a 360-day year.

The price of a put on the stock is: (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

The values of N(d1) and N(d2) are called risk neutral probabilities.

Which of the following statements about the Black-Scholes-Merton model is not true?

If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

The Black-Scholes-Merton model is the best model for valuing all types of options.

A riskless hedge requires more shares of stock than call options.

Which of the following statements is incorrect about the historical volatility?

The Black-Scholes-Merton option price is relatively insensitive to changes in the risk-free rate.

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

The option's sensitivity to an interest rate change is called rho.

The relationship between the option price and the exercise price is called

One of the variables that influences the price of the option is the expected return on the stock.

What happens when the volatility is zero in the Black-Scholes-Merton model?

If the actual call price is 3.79, the implied standard deviation is

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial 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

The values of N(d₁) and N(d₂) are called risk neutral probabilities.