Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

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
-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 4

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 5

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 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
-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 7

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 8

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 9

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 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

Question 10

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

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

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

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

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

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

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

The following information is given about options on the stock of a certain company. S₀ = 23 X = 20 r_c = 0.09 T = 0.5 ²= 0.15 No dividends are expected. Use this information to answer questions -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

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

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

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

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

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

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

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

The following information is given about options on the stock of a certain company. S0 = 23 X = 20 rc = 0.09 T = 0.5 2 = 0.15 No dividends are expected. Use this information to answer questions -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

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 following information is given about options on the stock of a certain company. S₀ = 23 X = 20 r_c = 0.09 T = 0.5 ²= 0.15 No dividends are expected. Use this information to answer questions -If the actual call price is 3.79,the implied standard deviation is