Question 1

Which of the following statements about an American call is not true?

Accepted Answer

A) Its time value decreases as expiration approaches 
B) Its maximum value is the stock price 
C) It can be exercised prior to expiration 
D) It pays dividends 
E) none of the above 
A) Its time value decreases as expiration approaches 
B) Its maximum value is the stock price 
C) It can be exercised prior to expiration 
D) It pays dividends 
E) none of the above D

Question 2

The gain from the early exercise of an American put is X(1 + r)-T - S0.

Accepted Answer

A) True 
 B)False  False

Question 3

Another expression for intrinsic value is

Accepted Answer

A) parity 
B) parity value 
C) exercise value 
D) all of the above 
E) none of the above 
A) parity 
B) parity value 
C) exercise value 
D) all of the above 
E) none of the above D

Question 4

The lower the exercise price,the more valuable the call option.

Accepted Answer

A) True 
 B)False

Question 5

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

Accepted Answer

A) True 
 B)False

Question 6

The following quotes were observed for options on a given stock on November 1 of a given year.These are American calls except where indicated.Use the information to answer questions 7 through 20.
   The stock price was 113.25.The risk-free rates were 7.30 percent (November),7.50 percent (December)and 7.62 percent (January).The times to expiration were 0.0384 (November),0.1342 (December),and 0.211 (January).Assume no dividends unless indicated.
-What is the intrinsic value of the January 110 call?

Accepted Answer

A) 0.00 
B) 8.30 
C) 3.75 
D) 5.00 
E) none of the above 
A) 0.00 
B) 8.30 
C) 3.75 
D) 5.00 
E) none of the above

Question 7

What is the lowest possible value of a European put?

Accepted Answer

A) Max(0,X - S0) 
B) X(1 + r)-T 
C) Max[0,S0 - X(1 + r)-T] 
D) Max[0,X(1 + r)-T - S0)] 
E) none of the above 
A) Max(0,X - S0) 
B) X(1 + r)-T 
C) Max[0,S0 - X(1 + r)-T] 
D) Max[0,X(1 + r)-T - S0)] 
E) none of the above

Question 8

The difference between a Treasury bill's face value and its price is called the

Accepted Answer

A) time value 
B) discount 
C) coupon rate 
D) bid 
E) none of the above 
A) time value 
B) discount 
C) coupon rate 
D) bid 
E) none of the above

Question 9

Holding everything else constant,put options are more expensive in periods of high interest rates.

Accepted Answer

A) True 
 B)False

Question 10

The time value of a call is greatest when the stock price is very high.

Accepted Answer

A) True 
 B)False

Question 11

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

Accepted Answer

A) True 
 B)False

Question 12

An American call should be exercised early when the stock price is extremely high and is expected to fall.

Accepted Answer

A) True 
 B)False

Question 13

The maximum value of a call is the stock price.

Accepted Answer

A) True 
 B)False

Question 14

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

Accepted Answer

A) True 
 B)False

Question 15

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

Accepted Answer

A) True 
 B)False

Question 16

The following quotes were observed for options on a given stock on November 1 of a given year.These are American calls except where indicated.Use the information to answer questions 7 through 20.
   The stock price was 113.25.The risk-free rates were 7.30 percent (November),7.50 percent (December)and 7.62 percent (January).The times to expiration were 0.0384 (November),0.1342 (December),and 0.211 (January).Assume no dividends unless indicated.
-What is the time value of the November 115 put?

Accepted Answer

A) 1.75 
B) 2.80 
C) 1.10 
D) 0.00 
E) none of the above 
A) 1.75 
B) 2.80 
C) 1.10 
D) 0.00 
E) none of the above

Question 17

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced.Using put-call parity,what would you expect the stock price to be? For this problem,treat the options as if they were European.

Accepted Answer

A) 113.73 
B) 123.23 
C) 121.23 
D) 112.77 
E) none of the above 
A) 113.73 
B) 123.23 
C) 121.23 
D) 112.77 
E) none of the above

Question 18

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

Accepted Answer

A) True 
 B)False

Question 19

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.80,and an ask discount of 5.86.What is the best estimate of the risk-free rate as given in the text?

Accepted Answer

A) 5.86 % 
B) 5.83 % 
C) 6.11 % 
D) 6.14 % 
E) none of the above 
A) 5.86 % 
B) 5.83 % 
C) 6.11 % 
D) 6.14 % 
E) none of the above

Question 20

The spread between the prices of two European puts,alike in all respects except exercise price,cannot exceed the difference in their exercise prices.

Accepted Answer

A) True 
 B)False

Which of the following statements about an American call is not true?

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.

Another expression for intrinsic value is

The lower the exercise price,the more valuable the call option.

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

What is the lowest possible value of a European put?

The difference between a Treasury bill's face value and its price is called the

Holding everything else constant,put options are more expensive in periods of high interest rates.

The time value of a call is greatest when the stock price is very high.

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

An American call should be exercised early when the stock price is extremely high and is expected to fall.

The maximum value of a call is the stock price.

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced.Using put-call parity,what would you expect the stock price to be? For this problem,treat the options as if they were European.

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.80,and an ask discount of 5.86.What is the best estimate of the risk-free rate as given in the text?

The spread between the prices of two European puts,alike in all respects except exercise price,cannot exceed the difference in their exercise prices.

Introduction

Structure of Options Markets

Option Pricing Models: the Binomial Model

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 3: Principles of Option Pricing

Which of the following statements about an American call is not true?

The gain from the early exercise of an American put is X(1 + r)-T - S0.

Another expression for intrinsic value is

The lower the exercise price,the more valuable the call option.

High volatility is bad for option holders because it increases the probability that the option will expire out-of-the-money.

What is the lowest possible value of a European put?

The difference between a Treasury bill's face value and its price is called the

Holding everything else constant,put options are more expensive in periods of high interest rates.

The time value of a call is greatest when the stock price is very high.

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

An American call should be exercised early when the stock price is extremely high and is expected to fall.

The maximum value of a call is the stock price.

The concept of the intrinsic value does not apply to European calls prior to expiration because they cannot be exercised immediately.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced.Using put-call parity,what would you expect the stock price to be? For this problem,treat the options as if they were European.

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.80,and an ask discount of 5.86.What is the best estimate of the risk-free rate as given in the text?

The spread between the prices of two European puts,alike in all respects except exercise price,cannot exceed the difference in their exercise prices.

Introduction

Structure of Options Markets

Option Pricing Models: the Binomial Model

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

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.