Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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
-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

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 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
-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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Binomial Model

Basic Option Strategies

Advanced Option Strategies

The 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 Applications

Managing Risk in an Organization

Filters

Exam 5: Option Pricing Models: the Black-Scholes-Merton Model

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Binomial Model

Basic Option Strategies

Advanced Option Strategies

The 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 Applications

Managing Risk in an Organization

Filters

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