Question 1

Which of the following statements is true about the relationship between the option price and the risk-free rate?

Accepted Answer

A) a call price is nearly linear with respect to the risk-free rate 
B) a call price is highly sensitive to the risk-free rate 
C) the risk-free rate affects a call but not a put 
D) the risk-free rate does not affect a call price 
E) none of the above 
A) a call price is nearly linear with respect to the risk-free rate 
B) a call price is highly sensitive to the risk-free rate 
C) the risk-free rate affects a call but not a put 
D) the risk-free rate does not affect a call price 
E) none of the above

Question 2

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Accepted Answer

A) True 
 B)False

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
$\sigma$S1U1P12 S1S1P0= 0.15
No dividends are expected.
Use this information to answer questions 1 through 8.
-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

Question 4

Which of the following is not correct about a call's gamma?

Accepted Answer

A) it is the same as a put's gamma 
B) it is large when the call is at-the-money 
C) it can be viewed as a measure of the risk of the delta 
D) it is a source of risk that can be hedged only by using another option 
E) none of the above 
A) it is the same as a put's gamma 
B) it is large when the call is at-the-money 
C) it can be viewed as a measure of the risk of the delta 
D) it is a source of risk that can be hedged only by using another option 
E) none of the above

Question 5

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

Accepted Answer

A) True 
 B)False

Question 6

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 7

The historical volatility is the same value as the implied volatility.

Accepted Answer

A) True 
 B)False

Question 8

The time to expiration of an option is based on a 360-day year.

Accepted Answer

A) True 
 B)False

Question 9

In the term structure of volatility,the forward volatility is the expected future volatility.

Accepted Answer

A) True 
 B)False

Question 10

In the Black-Scholes-Merton model,stock prices are assumed to behave randomly.

Accepted Answer

A) True 
 B)False

Question 11

Since dividends could trigger an early exercise of an American call,the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

Accepted Answer

A) True 
 B)False

Question 12

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.
-To construct a riskless hedge,the number of puts per 100 shares purchased 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 0.01. )

Accepted Answer

A) 0.7580 
B) 0.2420 
C) -0.2480 
D) -0.6628 
E) none of the above 
A) 0.7580 
B) 0.2420 
C) -0.2480 
D) -0.6628 
E) none of the above

Question 13

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 price of a put on the stock 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 10 cents. )

Accepted Answer

A) 0.85 
B) 8.64 
C) 2.35 
D) 4.88 
E) none of the above 
A) 0.85 
B) 8.64 
C) 2.35 
D) 4.88 
E) none of the above

Question 14

What happens when the volatility is zero in the Black-Scholes-Merton model?

Accepted Answer

A) the option price converges to either zero or the lower bound 
B) the option price converges to the intrinsic value 
C) the option automatically expires out of the money 
D) the gamma and delta converge 
E) none of the above 
A) the option price converges to either zero or the lower bound 
B) the option price converges to the intrinsic value 
C) the option automatically expires out of the money 
D) the gamma and delta converge 
E) none of the above

Question 15

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

Accepted Answer

A) True 
 B)False

Question 16

The volatility smile is the relationship between implied volatility and historical volatility.

Accepted Answer

A) True 
 B)False

Question 17

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

Accepted Answer

A) True 
 B)False

Question 18

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

Accepted Answer

A) the lognormal distribution 
B) the d1 and d2 statistic 
C) the z statistic 
D) the f distribution 
E) none of the above 
A) the lognormal distribution 
B) the d1 and d2 statistic 
C) the z statistic 
D) the f distribution 
E) none of the above

Question 19

A riskless hedge requires more shares of stock than call options.

Accepted Answer

A) True 
 B)False

Question 20

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 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

Which of the following statements is true about the relationship between the option price and the risk-free rate?

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Which of the following is not correct about a call's gamma?

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

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

The historical volatility is the same value as the implied volatility.

The time to expiration of an option is based on a 360-day year.

In the term structure of volatility,the forward volatility is the expected future volatility.

In the Black-Scholes-Merton model,stock prices are assumed to behave randomly.

Since dividends could trigger an early exercise of an American call,the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

What happens when the volatility is zero in the Black-Scholes-Merton model?

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

The volatility smile is the relationship between implied volatility and historical volatility.

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

A riskless hedge requires more shares of stock than call options.

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

Which of the following statements is true about the relationship between the option price and the risk-free rate?

The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.

Which of the following is not correct about a call's gamma?

The Black-Scholes-Merton model assumes that the volatility does not change throughout the option's life.

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

The historical volatility is the same value as the implied volatility.

The time to expiration of an option is based on a 360-day year.

In the term structure of volatility,the forward volatility is the expected future volatility.

In the Black-Scholes-Merton model,stock prices are assumed to behave randomly.

Since dividends could trigger an early exercise of an American call,the Black-Scholes-Merton dividend adjustment will provide the correct price of an American call.

What happens when the volatility is zero in the Black-Scholes-Merton model?

One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.

The volatility smile is the relationship between implied volatility and historical volatility.

The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.

The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is

A riskless hedge requires more shares of stock than call options.

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