Question 1

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

Accepted Answer

A) True 
 B)False

Question 2

In a binomial model,if the call price in the market is higher than the call price given by the model,you should

Accepted Answer

A) sell the call and sell short the stock 
B) buy the call and sell short the stock 
C) buy the stock and sell the call 
D) buy the call and buy the stock 
E) none of the above 
A) sell the call and sell short the stock 
B) buy the call and sell short the stock 
C) buy the stock and sell the call 
D) buy the call and buy the stock 
E) none of the above

Question 3

Now extend the one-period binomial model to a two-period world.Answer questions.
-What is the current value of the call?

Accepted Answer

A) 8.00 
B) 7.30 
C) 11.13 
D) 0.619 
E) none of the above 
A) 8.00 
B) 7.30 
C) 11.13 
D) 0.619 
E) none of the above

Question 4

When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

Accepted Answer

A) True 
 B)False

Question 5

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

Accepted Answer

A) True 
 B)False

Question 6

In a one-period binomial model with Su = 49.5,Sd = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

Accepted Answer

A) 2.17 
B) 0.50 
C) 9.50 
D) 5.00 
E) none of the above 
A) 2.17 
B) 0.50 
C) 9.50 
D) 5.00 
E) none of the above

Question 7

The binomial model assumes that investors are risk neutral.

Accepted Answer

A) True 
 B)False

Question 8

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.

Accepted Answer

A) True 
 B)False

Question 9

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80.
-What is the theoretical value of the call?

Accepted Answer

A) 8.00 
B) 4.39 
C) 5.15 
D) 5.36 
E) none of the above 
A) 8.00 
B) 4.39 
C) 5.15 
D) 5.36 
E) none of the above

Question 10

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

Accepted Answer

A) the up and down factors must be increased 
B) the risk-free rate must be increased 
C) the up and down factors and the risk-free rate must be decreased 
D) the initial stock price must be proportionately reduced 
E) none of the above 
A) the up and down factors must be increased 
B) the risk-free rate must be increased 
C) the up and down factors and the risk-free rate must be decreased 
D) the initial stock price must be proportionately reduced 
E) none of the above

Question 11

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Accepted Answer

A) True 
 B)False

Question 12

Now extend the one-period binomial model to a two-period world.Answer questions.
-What is the hedge ratio if the stock goes down one period?

Accepted Answer

A) 0.00 
B) 0.0725 
C) 1.00 
D) 0.73 
E) none of the above 
A) 0.00 
B) 0.0725 
C) 1.00 
D) 0.73 
E) none of the above

Question 13

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

Accepted Answer

A) European calls and European puts 
B) European calls and American puts 
C) American puts and European puts 
D) American puts and European calls 
E) none of the above 
A) European calls and European puts 
B) European calls and American puts 
C) American puts and European puts 
D) American puts and European calls 
E) none of the above

Question 14

The hedge ratio is the number of shares per call in a risk-free portfolio.

Accepted Answer

A) True 
 B)False

Question 15

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

Accepted Answer

A) True 
 B)False

Question 16

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80.
-What would be the call's price if the stock goes up?

Accepted Answer

A) 3.60 
B) 8.00 
C) 5.71 
D) 4.39 
E) none of the above 
A) 3.60 
B) 8.00 
C) 5.71 
D) 4.39 
E) none of the above

Question 17

Which of the following statements about the binomial option pricing model is not always true?

Accepted Answer

A) it can capture the effect of early exercise 
B) it can accommodate a large number of possible stock prices at expiration 
C) it reflects the effects of the stock price,exercise price,risk-free rate,volatility and time to expiration 
D) it gives the price at which the option will trade in the market. 
E) none of the above 
A) it can capture the effect of early exercise 
B) it can accommodate a large number of possible stock prices at expiration 
C) it reflects the effects of the stock price,exercise price,risk-free rate,volatility and time to expiration 
D) it gives the price at which the option will trade in the market. 
E) none of the above

Question 18

Which of the following statements about the binomial model is incorrect?

Accepted Answer

A) it converges to the Black-Scholes-Merton model 
B) it can accommodate early exercise 
C) it allows only two stock prices at expiration 
D) it can be extended to a large number of time periods 
E) none of the above 
A) it converges to the Black-Scholes-Merton model 
B) it can accommodate early exercise 
C) it allows only two stock prices at expiration 
D) it can be extended to a large number of time periods 
E) none of the above

Question 19

If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters,the tree will explode and end up with far more outcomes than time periods.

Accepted Answer

A) True 
 B)False

Question 20

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

Accepted Answer

A) True 
 B)False

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

In a binomial model,if the call price in the market is higher than the call price given by the model,you should

Now extend the one-period binomial model to a two-period world.Answer questions. -What is the current value of the call?

When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

In a one-period binomial model with Su = 49.5,Sd = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

The binomial model assumes that investors are risk neutral.

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What is the theoretical value of the call?

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Now extend the one-period binomial model to a two-period world.Answer questions. -What is the hedge ratio if the stock goes down one period?

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

The hedge ratio is the number of shares per call in a risk-free portfolio.

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What would be the call's price if the stock goes up?

Which of the following statements about the binomial option pricing model is not always true?

Which of the following statements about the binomial model is incorrect?

If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters,the tree will explode and end up with far more outcomes than time periods.

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Black-Scholes-Merton 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 4: Option Pricing Models: the Binomial Model

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

In a binomial model,if the call price in the market is higher than the call price given by the model,you should

Now extend the one-period binomial model to a two-period world.Answer questions. -What is the current value of the call?

When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

In a one-period binomial model with Su = 49.5,Sd = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

The binomial model assumes that investors are risk neutral.

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What is the theoretical value of the call?

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Now extend the one-period binomial model to a two-period world.Answer questions. -What is the hedge ratio if the stock goes down one period?

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

The hedge ratio is the number of shares per call in a risk-free portfolio.

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What would be the call's price if the stock goes up?

Which of the following statements about the binomial option pricing model is not always true?

Which of the following statements about the binomial model is incorrect?

If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters,the tree will explode and end up with far more outcomes than time periods.

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Black-Scholes-Merton 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