Exam 16: Option Valuation

A ________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now should be worth ________ today.

The price of a stock put option is ________ correlated with the stock price and ________ correlated with the exercise price.

The Black-Scholes hedge ratio for a long put option is equal to ________.

A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should ________.

The current stock price of National Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National Paper's stock is 25%. You want to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes OPM, the call option should be worth ________ today.

A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading at $2.25, what is the time value embedded in the option?

The intrinsic value of an out-of-the-money call option ________.

In the Black-Scholes model, if an option is not likely to be exercised, both N(d₁) and N(d₂) will be close to ________. If the option is definitely likely to be exercised, N(d₁) and N(d₂) will be close to ________.

Which combination of stock, exercise, and option prices are most likely associated with an American call option?

The stock price of Apax Inc. is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth ________ today.

A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ________ intrinsic value and ________ time value.

A higher-dividend payout policy will have a ________ impact on the value of a put and a ________ impact on the value of a call.

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

A put option has a strike price of $35 and a stock price of $38. If the put option is trading at $1.25, what is the time value embedded in the option?

The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25?

Strike prices of options are adjusted for ________ but not for ________.

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the ________.

Hedge ratios for long puts are always ________.

The ________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option.