Question 1

Which of the following statements about the delta is not true?

Accepted Answer

A)  it ranges from zero to one 
B)  it converges to zero or one at expiration 
C)  it is given by N(d1) in the Black-Scholes-Merton model 
D)  it changes slowly near expiration if the option is at-the-money 
E)  none of the above 
A)  it ranges from zero to one 
B)  it converges to zero or one at expiration 
C)  it is given by N(d1) in the Black-Scholes-Merton model 
D)  it changes slowly near expiration if the option is at-the-money 
E)  none of the above

Question 2

When the risk-free rate is zero, the Black-Scholes formula converges to the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 3

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

Accepted Answer

A) True 
 B)False

Question 4

Vega captures the combined effects of time decay and volatility.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?

Accepted Answer

A)  the volatility 
B)  the risk-free rate 
C)  the stock price 
D)  the time to expiration 
E)  the exercise price 
A)  the volatility 
B)  the risk-free rate 
C)  the stock price 
D)  the time to expiration 
E)  the exercise price

Question 6

The following information is given about options on the stock of a certain company.
SS1U1B10S1U1B0 = 23 X = 20
rS1U1B1cS1U1B0 = 0.09 T = 0.5
F1F1F1S1F1F1F10S1U1P12 S1S1P0= 0.15
No dividends are expected.
Use this information to answer questions .
-What value does the Black-Scholes-Merton model predict for the call? (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)  5.35 
B)  1.10 
C)  4.73 
D)  6.50 
E)  none of the above 
A)  5.35 
B)  1.10 
C)  4.73 
D)  6.50 
E)  none of the above

Question 7

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

Accepted Answer

A)  the lognormal distribution 
B)  the d1 and d2 statistic 
C)  the z statistic 
D)  the f distribution 
E)  none of the above 
A)  the lognormal distribution 
B)  the d1 and d2 statistic 
C)  the z statistic 
D)  the f distribution 
E)  none of the above

Question 8

The option's rate of time value decay is represented by its theta.

Accepted Answer

A) True 
 B)False

Question 9

What is the reason for executing a gamma hedge?

Accepted Answer

A)  the volatility can change 
B)  the stock price can make a large move 
C)  the stock price moves are too small for a delta hedge to work 
D)  there is no true risk-free rate 
E)  none of the above 
A)  the volatility can change 
B)  the stock price can make a large move 
C)  the stock price moves are too small for a delta hedge to work 
D)  there is no true risk-free rate 
E)  none of the above

Question 10

The call's vega 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 0.05.)

Accepted Answer

A)  -3.02 
B)  0.046 
C)  -0.792 
D)  4.67 
E)  none of the above 
A)  -3.02 
B)  0.046 
C)  -0.792 
D)  4.67 
E)  none of the above

Question 11

Which of the following assumptions of the Black-Scholes-Merton model is not correct?

Accepted Answer

A)  the stock volatility is constant 
B)  the stock return follows a normal distribution 
C)  there are no transaction costs 
D)  there are no taxes 
E)  none of the above 
A)  the stock volatility is constant 
B)  the stock return follows a normal distribution 
C)  there are no transaction costs 
D)  there are no taxes 
E)  none of the above

Question 12

Which of the following is not correct about a call's gamma?

Accepted Answer

A)  it is the same as a put's gamma 
B)  it is large when the call is at-the-money 
C)  it can be viewed as a measure of the risk of the delta 
D)  it is a source of risk that can be hedged only by using another option 
E)  none of the above 
A)  it is the same as a put's gamma 
B)  it is large when the call is at-the-money 
C)  it can be viewed as a measure of the risk of the delta 
D)  it is a source of risk that can be hedged only by using another option 
E)  none of the above

Question 13

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Accepted Answer

A) True 
 B)False

Question 14

Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation? (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 shares.)

Accepted Answer

A)  buy 791 shares, sell 1,000 calls 
B)  buy 705 shares, sell 1,000 calls 
C)  sell short 791 shares, buy 1,000 calls 
D)  sell short 705 shares, buy 1,000 calls 
E)  none of the above 
A)  buy 791 shares, sell 1,000 calls 
B)  buy 705 shares, sell 1,000 calls 
C)  sell short 791 shares, buy 1,000 calls 
D)  sell short 705 shares, buy 1,000 calls 
E)  none of the above

Question 15

In the Black-Scholes-Merton model, stock prices are assumed to behave randomly.

Accepted Answer

A) True 
 B)False

Question 16

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options, a process referred to as

Accepted Answer

A)  actively managing 
B)  continuous reconciliation 
C)  marking to market 
D)  dynamic trading 
E)  none of the above 
A)  actively managing 
B)  continuous reconciliation 
C)  marking to market 
D)  dynamic trading 
E)  none of the above

Question 17

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

Accepted Answer

A) True 
 B)False

Question 18

In the term structure of volatility, the forward volatility is the expected future volatility.

Accepted Answer

A) True 
 B)False

Question 19

The relationship between the volatility and the time to expiration is called the

Accepted Answer

A)  volatility smile 
B)  volatility skew 
C)  term structure of volatility 
D)  theta 
E)  none of the above 
A)  volatility smile 
B)  volatility skew 
C)  term structure of volatility 
D)  theta 
E)  none of the above

Question 20

The volatility smile is the relationship between implied volatility and historical volatility.

Accepted Answer

A) True 
 B)False

Which of the following statements about the delta is not true?

When the risk-free rate is zero, the Black-Scholes formula converges to the intrinsic value.

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

Vega captures the combined effects of time decay and volatility.

Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

The option's rate of time value decay is represented by its theta.

What is the reason for executing a gamma hedge?

The call's vega 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 0.05.)

Which of the following assumptions of the Black-Scholes-Merton model is not correct?

Which of the following is not correct about a call's gamma?

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation? (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 shares.)

In the Black-Scholes-Merton model, stock prices are assumed to behave randomly.

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options, a process referred to as

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

In the term structure of volatility, the forward volatility is the expected future volatility.

The relationship between the volatility and the time to expiration is called the

The volatility smile is the relationship between implied volatility and historical volatility.

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

Which of the following statements about the delta is not true?

When the risk-free rate is zero, the Black-Scholes formula converges to the intrinsic value.

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

Vega captures the combined effects of time decay and volatility.

Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

The option's rate of time value decay is represented by its theta.

What is the reason for executing a gamma hedge?

The call's vega 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 0.05.)

Which of the following assumptions of the Black-Scholes-Merton model is not correct?

Which of the following is not correct about a call's gamma?

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation? (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 shares.)

In the Black-Scholes-Merton model, stock prices are assumed to behave randomly.

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options, a process referred to as

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

In the term structure of volatility, the forward volatility is the expected future volatility.

The relationship between the volatility and the time to expiration is called the

The volatility smile is the relationship between implied volatility and historical volatility.

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