Question 1

An option's gamma represents the risk of the delta changing.

Accepted Answer

A) True 
 B)False

Question 2

To construct a riskless hedge, the number of puts per 100 shares purchased 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 0.01.)

Accepted Answer

A)  0.7580 
B)  0.2420 
C)  -0.2480 
D)  -0.6628 
E)  none of the above 
A)  0.7580 
B)  0.2420 
C)  -0.2480 
D)  -0.6628 
E)  none of the above

Question 3

The Black-Scholes-Merton model for European puts, obtained by applying put-call parity to the Black-Scholes-Merton model for European calls, is customarily expressed by which of the following:

Accepted Answer

A)    
B)    
C)    
D)    
E)  none of the above 
A)    
B)    
C)    
D)    
E)  none of the above

Question 4

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

Accepted Answer

A)  it is a discrete time model 
B)  it is the limit of the binomial model 
C)  it is a continuous time model 
D)  it gives the price of a European option 
E)  none of the above 
A)  it is a discrete time model 
B)  it is the limit of the binomial model 
C)  it is a continuous time model 
D)  it gives the price of a European option 
E)  none of the above

Question 5

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

Accepted Answer

A)  when the number of time periods is large 
B)  when the option is at-the-money 
C)  when the option is in-the-money 
D)  when the option is out-of-the-money 
E)  none of the above 
A)  when the number of time periods is large 
B)  when the option is at-the-money 
C)  when the option is in-the-money 
D)  when the option is out-of-the-money 
E)  none of the above

Question 6

An approximate implied volatility for an at-the-money call can be solved directly.

Accepted Answer

A) True 
 B)False

Question 7

The option's delta is approximately the change in the option price for a change in the stock price.

Accepted Answer

A) True 
 B)False

Question 8

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

Accepted Answer

A) True 
 B)False

Question 9

In order to compute the implied volatility, one must force the option to be correctly priced by the model.

Accepted Answer

A) True 
 B)False

Question 10

The implied volatility is obtained by finding the standard deviation that, when used in the Black-Scholes-Merton model, makes the

Accepted Answer

A)  model price expire at zero 
B)  model price equal the market price of the option 
C)  model price such that it exceeds currently traded market option values 
D)  model price equal the intrinsic value of the underlying stock 
E)  none of the above 
A)  model price expire at zero 
B)  model price equal the market price of the option 
C)  model price such that it exceeds currently traded market option values 
D)  model price equal the intrinsic value of the underlying stock 
E)  none of the above

Question 11

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

Accepted Answer

A)  the implied volatility often differs across options with different exercise prices 
B)  the implied volatility equals the historical volatility if the option is correctly priced 
C)  the implied volatility is determined by trial and error 
D)  the implied volatility is nearly linearly related to the option price 
E)  none of the above 
A)  the implied volatility often differs across options with different exercise prices 
B)  the implied volatility equals the historical volatility if the option is correctly priced 
C)  the implied volatility is determined by trial and error 
D)  the implied volatility is nearly linearly related to the option price 
E)  none of the above

Question 12

The implied volatilities of a call and a put with the same terms should be the same.

Accepted Answer

A) True 
 B)False

Question 13

If the simple return on a Treasury bill is 8.5 percent, the risk-free rate in the Black-Scholes-Merton model is

Accepted Answer

A)  8.77 percent 
B)  8.93 percent 
C)  8.55 percent 
D)  8.20 percent 
E)  none of the above 
A)  8.77 percent 
B)  8.93 percent 
C)  8.55 percent 
D)  8.20 percent 
E)  none of the above

Question 14

The historical volatility is the same value as the implied volatility.

Accepted Answer

A) True 
 B)False

Question 15

The level of liquidity of the underlying instrument will influence the behavior of related options.

Accepted Answer

A) True 
 B)False

Question 16

The binomial model always gives the same option price as the Black-Scholes-Merton model.

Accepted Answer

A) True 
 B)False

Question 17

Since dividends could trigger an early exercise of an American call, the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is true about the relationship between the option price and the risk-free rate?

Accepted Answer

A)  a call price is nearly linear with respect to the risk-free rate 
B)  a call price is highly sensitive to the risk-free rate 
C)  the risk-free rate affects a call but not a put 
D)  the risk-free rate does not affect a call price 
E)  none of the above 
A)  a call price is nearly linear with respect to the risk-free rate 
B)  a call price is highly sensitive to the risk-free rate 
C)  the risk-free rate affects a call but not a put 
D)  the risk-free rate does not affect a call price 
E)  none of the above

Question 19

The pattern of volatility across exercise prices is often called

Accepted Answer

A)  the price-fluctuation graph 
B)  the volatility smile 
C)  the term structure of implied volatility 
D)  the skew 
E)  none of the above 
A)  the price-fluctuation graph 
B)  the volatility smile 
C)  the term structure of implied volatility 
D)  the skew 
E)  none of the above

Question 20

If we now assume that the stock pays a single dividend of 2.25 in three months, 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)  17.75 
B)  20.75 
C)  20.00 
D)  20.80 
E)  none of the above 
A)  17.75 
B)  20.75 
C)  20.00 
D)  20.80 
E)  none of the above

An option's gamma represents the risk of the delta changing.

To construct a riskless hedge, the number of puts per 100 shares purchased 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 0.01.)

The Black-Scholes-Merton model for European puts, obtained by applying put-call parity to the Black-Scholes-Merton model for European calls, is customarily expressed by which of the following:

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

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

An approximate implied volatility for an at-the-money call can be solved directly.

The option's delta is approximately the change in the option price for a change in the stock price.

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

In order to compute the implied volatility, one must force the option to be correctly priced by the model.

The implied volatility is obtained by finding the standard deviation that, when used in the Black-Scholes-Merton model, makes the

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

The implied volatilities of a call and a put with the same terms should be the same.

If the simple return on a Treasury bill is 8.5 percent, the risk-free rate in the Black-Scholes-Merton model is

The historical volatility is the same value as the implied volatility.

The level of liquidity of the underlying instrument will influence the behavior of related options.

The binomial model always gives the same option price as the Black-Scholes-Merton model.

Since dividends could trigger an early exercise of an American call, the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

Which of the following statements is true about the relationship between the option price and the risk-free rate?

The pattern of volatility across exercise prices is often called

If we now assume that the stock pays a single dividend of 2.25 in three months, 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.)

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

An option's gamma represents the risk of the delta changing.

To construct a riskless hedge, the number of puts per 100 shares purchased 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 0.01.)

The Black-Scholes-Merton model for European puts, obtained by applying put-call parity to the Black-Scholes-Merton model for European calls, is customarily expressed by which of the following:

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

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

An approximate implied volatility for an at-the-money call can be solved directly.

The option's delta is approximately the change in the option price for a change in the stock price.

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

In order to compute the implied volatility, one must force the option to be correctly priced by the model.

The implied volatility is obtained by finding the standard deviation that, when used in the Black-Scholes-Merton model, makes the

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

The implied volatilities of a call and a put with the same terms should be the same.

If the simple return on a Treasury bill is 8.5 percent, the risk-free rate in the Black-Scholes-Merton model is

The historical volatility is the same value as the implied volatility.

The level of liquidity of the underlying instrument will influence the behavior of related options.

The binomial model always gives the same option price as the Black-Scholes-Merton model.

Since dividends could trigger an early exercise of an American call, the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

Which of the following statements is true about the relationship between the option price and the risk-free rate?

The pattern of volatility across exercise prices is often called

If we now assume that the stock pays a single dividend of 2.25 in three months, 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.)

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