Question 1

Vega captures the combined effects of time decay and volatility.

Accepted Answer

A) True 
 B)False  False

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

The option's rate of time value decay is represented by its theta.

Accepted Answer

A) True 
 B)False  True

Question 4

The following information is given about options on the stock of a certain company.
SS1U1B10S1U1B0 = 23 X = 20
rS1U1B1cS1U1B0 = 0.09 T = 0.5
$\sigma$S1U1P12 S1S1P0= 0.15
No dividends are expected.
Use this information to answer questions 1 through 8.
-The call's vega 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 0.05. )

Accepted Answer

A) -3.02 
B) 0.046 
C) -0.792 
D) 4.67 
E) none of the above 
A) -3.02 
B) 0.046 
C) -0.792 
D) 4.67 
E) none of the above

Question 5

The level of liquidity of the underlying instrument will influence the behavior of related options.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Which of the following statements about the Black-Scholes-Merton model is not true?

Accepted Answer

A) decreasing the volatility lowers the call price 
B) the expected stock price plays a role in the model 
C) the risk-free rate is continuously compounded 
D) the model is consistent with put-call parity 
E) none of the above 
A) decreasing the volatility lowers the call price 
B) the expected stock price plays a role in the model 
C) the risk-free rate is continuously compounded 
D) the model is consistent with put-call parity 
E) none of the above

Question 8

The following information is given about options on the stock of a certain company.
SS1U1B10S1U1B0 = 23 X = 20
rS1U1B1cS1U1B0 = 0.09 T = 0.5
$\sigma$S1U1P12 S1S1P0= 0.15
No dividends are expected.
Use this information to answer questions 1 through 8.
-Suppose you feel that the call is overpriced.What strategy should you use to exploit the apparent mis-valuation? (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 9

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

Accepted Answer

A) True 
 B)False

Question 10

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

Accepted Answer

A) True 
 B)False

Question 11

The relationship between the option price and the exercise price is called

Accepted Answer

A) the gamma 
B) the vega 
C) the omega 
D) the zeta 
E) none of the above 
A) the gamma 
B) the vega 
C) the omega 
D) the zeta 
E) none of the above

Question 12

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 13

The binomial model always gives the same option price as the Black-Scholes-Merton model.

Accepted Answer

A) True 
 B)False

Question 14

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

The pattern of volatility across exercise prices is often called

Accepted Answer

A) the price-fluctuation graph 
B) the volatility smile 
C) the term structure of implied volatility 
D) the skew 
E) none of the above 
A) the price-fluctuation graph 
B) the volatility smile 
C) the term structure of implied volatility 
D) the skew 
E) none of the above

Question 19

The following information is given about options on the stock of a certain company.
SS1U1B10S1U1B0 = 23 X = 20
rS1U1B1cS1U1B0 = 0.09 T = 0.5
$\sigma$S1U1P12 S1S1P0= 0.15
No dividends are expected.
Use this information to answer questions 1 through 8.
-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 20

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

Accepted Answer

A) True 
 B)False

Vega captures the combined effects of time decay and volatility.

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

The option's rate of time value decay is represented by its theta.

The level of liquidity of the underlying instrument will influence the behavior of related options.

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

Which of the following statements about the Black-Scholes-Merton model is not true?

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

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

The relationship between the option price and the exercise price is called

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

The binomial model always gives the same option price as the Black-Scholes-Merton model.

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

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

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

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

The pattern of volatility across exercise prices is often called

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

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Binomial Model

Basic Option Strategies

Advanced Option Strategies

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 Appplications

Managing Risk in an Organization

Filters

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

Vega captures the combined effects of time decay and volatility.

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

The option's rate of time value decay is represented by its theta.

The level of liquidity of the underlying instrument will influence the behavior of related options.

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

Which of the following statements about the Black-Scholes-Merton model is not true?

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

The Black-Scholes-Merton model assumes that the underlying company never goes bankrupt.

The relationship between the option price and the exercise price is called

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

The binomial model always gives the same option price as the Black-Scholes-Merton model.

The Black-Scholes-Merton model is the discrete time limit to the binomial model.

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

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

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

The pattern of volatility across exercise prices is often called

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

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Binomial Model

Basic Option Strategies

Advanced Option Strategies

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 Appplications

Managing Risk in an Organization

Filters