Question 1

The implied volatility is obtained by finding the standard deviation that,when used in the Black-Scholes-Merton model,makes the

Accepted Answer

A) model price expire at zero 
B) model price equal the market price of the option 
C) model price such that it exceeds currently traded market option values 
D) model price equal the intrinsic value of the underlying stock 
E) none of the above 
A) model price expire at zero 
B) model price equal the market price of the option 
C) model price such that it exceeds currently traded market option values 
D) model price equal the intrinsic value of the underlying stock 
E) none of the above

Question 2

Which of the following statements is incorrect about the historical volatility?

Accepted Answer

A) if used in the Black-Scholes-Merton model,it gives the current market price 
B) it is based on the volatility of the log return on the stock 
C) it requires a sample of recent returns 
D) it should be converted to an annualized volatility 
E) none of the above 
A) if used in the Black-Scholes-Merton model,it gives the current market price 
B) it is based on the volatility of the log return on the stock 
C) it requires a sample of recent returns 
D) it should be converted to an annualized volatility 
E) none of the above

Question 3

If the stock price is 44,the exercise price is 40,the put price is 1.54,and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11,the implied volatility will be

Accepted Answer

A) higher than 0.28 
B) lower than 0.28 
C) 0.28 
D) lower than the risk-free rate 
E) none of the above 
A) higher than 0.28 
B) lower than 0.28 
C) 0.28 
D) lower than the risk-free rate 
E) none of the above

Question 4

The Black-Scholes-Merton model is the best model for valuing all types of options.

Accepted Answer

A) True 
 B)False

Question 5

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options,a process referred to as

Accepted Answer

A) actively managing 
B) continuous reconciliation 
C) marking to market 
D) dynamic trading 
E) none of the above 
A) actively managing 
B) continuous reconciliation 
C) marking to market 
D) dynamic trading 
E) none of the above

Question 6

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

Accepted Answer

A) True 
 B)False

Question 7

The implied volatilities of a call and a put with the same terms should be the same.

Accepted Answer

A) True 
 B)False

Question 8

An option's gamma represents the risk of the delta changing.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) it ranges from zero to one 
B) it converges to zero or one at expiration 
C) it is given by N(d1)in the Black-Scholes-Merton model 
D) it changes slowly near expiration if the option is at-the-money 
E) none of the above 
A) it ranges from zero to one 
B) it converges to zero or one at expiration 
C) it is given by N(d1)in the Black-Scholes-Merton model 
D) it changes slowly near expiration if the option is at-the-money 
E) none of the above

Question 10

The values of N(d1)and N(d2)are called risk neutral probabilities.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

Accepted Answer

A) delta 
B) gamma 
C) rho 
D) theta 
E) sigma 
A) delta 
B) gamma 
C) rho 
D) theta 
E) sigma

Question 12

When the risk-free rate is zero,the Black-Scholes formula converges to the intrinsic value.

Accepted Answer

A) True 
 B)False

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.
-If the actual call price is 3.79,the implied standard deviation is

Accepted Answer

A) 0.25 
B) greater than 0.25 
C) less than 0.25 
D) infinite 
E) none of the above 
A) 0.25 
B) greater than 0.25 
C) less than 0.25 
D) infinite 
E) none of the above

Question 14

The option's delta is approximately the change in the option price for a change in the stock price.

Accepted Answer

A) True 
 B)False

Question 15

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

Accepted Answer

A) True 
 B)False

Question 16

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

Accepted Answer

A) when the number of time periods is large 
B) when the option is at-the-money 
C) when the option is in-the-money 
D) when the option is out-of-the-money 
E) none of the above 
A) when the number of time periods is large 
B) when the option is at-the-money 
C) when the option is in-the-money 
D) when the option is out-of-the-money 
E) none of the above

Question 17

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

Accepted Answer

A) the stock volatility is constant 
B) the stock return follows a normal distribution 
C) there are no transaction costs 
D) there are no taxes 
E) none of the above 
A) the stock volatility is constant 
B) the stock return follows a normal distribution 
C) there are no transaction costs 
D) there are no taxes 
E) none of the above

Question 18

The Black-Scholes-Merton model for European puts,obtained by applying put-call parity to the Black-Scholes-Merton model for European calls,is customarily expressed by which of the following:

Accepted Answer

A)  $\mathrm { P } = \mathrm { Xe } ^ { - \mathrm { I } _ { \mathrm { e } } \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 2 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 1 } \right)$ 
B)  $\mathrm { P } = \mathrm { X } ( 1 + \mathrm { r } ) ^ { - \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 2 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 1 } \right)$ 
C)  $\mathrm { P } = \mathrm { X } ( 1 + \mathrm { r } ) ^ { - \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 1 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 2 } \right)$ 
D)  $\mathrm { P } = \mathrm { Xe } ^ { - \mathrm { I } _ { \mathrm { e } } \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 1 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 2 } \right)$ 
E) none of the above 
A)  $\mathrm { P } = \mathrm { Xe } ^ { - \mathrm { I } _ { \mathrm { e } } \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 2 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 1 } \right)$ 
B)  $\mathrm { P } = \mathrm { X } ( 1 + \mathrm { r } ) ^ { - \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 2 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 1 } \right)$ 
C)  $\mathrm { P } = \mathrm { X } ( 1 + \mathrm { r } ) ^ { - \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 1 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 2 } \right)$ 
D)  $\mathrm { P } = \mathrm { Xe } ^ { - \mathrm { I } _ { \mathrm { e } } \mathrm { T } } \mathrm { N } \left( - \mathrm { d } _ { 1 } \right) - \mathrm { S } _ { 0 } \mathrm {~N} \left( - \mathrm { d } _ { 2 } \right)$ 
E) none of the above

Question 19

What is the reason for executing a gamma hedge?

Accepted Answer

A) the volatility can change 
B) the stock price can make a large move 
C) the stock price moves are too small for a delta hedge to work 
D) there is no true risk-free rate 
E) none of the above 
A) the volatility can change 
B) the stock price can make a large move 
C) the stock price moves are too small for a delta hedge to work 
D) there is no true risk-free rate 
E) none of the above

Question 20

If the simple return on a Treasury bill is 8.5 percent,the risk-free rate in the Black-Scholes-Merton model is

Accepted Answer

A) 8.77 percent 
B) 8.93 percent 
C) 8.55 percent 
D) 8.20 percent 
E) none of the above 
A) 8.77 percent 
B) 8.93 percent 
C) 8.55 percent 
D) 8.20 percent 
E) none of the above

The implied volatility is obtained by finding the standard deviation that,when used in the Black-Scholes-Merton model,makes the

Which of the following statements is incorrect about the historical volatility?

If the stock price is 44,the exercise price is 40,the put price is 1.54,and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11,the implied volatility will be

The Black-Scholes-Merton model is the best model for valuing all types of options.

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options,a process referred to as

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

The implied volatilities of a call and a put with the same terms should be the same.

An option's gamma represents the risk of the delta changing.

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

The values of N(d₁)and N(d₂)are called risk neutral probabilities.

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

When the risk-free rate is zero,the Black-Scholes formula converges to the intrinsic value.

The following information is given about options on the stock of a certain company. S₀ = 23 X = 20 r_c = 0.09 T = 0.5 $\sigma$ ²= 0.15 No dividends are expected. Use this information to answer questions 1 through 8. -If the actual call price is 3.79,the implied standard deviation is

The option's delta is approximately the change in the option price for a change in the stock price.

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

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

The Black-Scholes-Merton model for European puts,obtained by applying put-call parity to the Black-Scholes-Merton model for European calls,is customarily expressed by which of the following:

What is the reason for executing a gamma hedge?

If the simple return on a Treasury bill is 8.5 percent,the risk-free rate in the Black-Scholes-Merton model is

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

The implied volatility is obtained by finding the standard deviation that,when used in the Black-Scholes-Merton model,makes the

Which of the following statements is incorrect about the historical volatility?

If the stock price is 44,the exercise price is 40,the put price is 1.54,and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11,the implied volatility will be

The Black-Scholes-Merton model is the best model for valuing all types of options.

A hedge portfolio is established and maintained by constantly adjusting the relative proportions of stock and options,a process referred to as

The Black-Scholes-Merton model assumes the underlying instrument movement is lognormally distributed.

The implied volatilities of a call and a put with the same terms should be the same.

An option's gamma represents the risk of the delta changing.

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

The values of N(d1)and N(d2)are called risk neutral probabilities.

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

When the risk-free rate is zero,the Black-Scholes formula converges to the intrinsic value.

The following information is given about options on the stock of a certain company. S0 = 23 X = 20 rc = 0.09 T = 0.5 σ\sigmaσ 2 = 0.15 No dividends are expected. Use this information to answer questions 1 through 8. -If the actual call price is 3.79,the implied standard deviation is

The option's delta is approximately the change in the option price for a change in the stock price.

The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

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

The Black-Scholes-Merton model for European puts,obtained by applying put-call parity to the Black-Scholes-Merton model for European calls,is customarily expressed by which of the following:

What is the reason for executing a gamma hedge?

If the simple return on a Treasury bill is 8.5 percent,the risk-free rate in the Black-Scholes-Merton model is

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

The values of N(d₁)and N(d₂)are called risk neutral probabilities.

The following information is given about options on the stock of a certain company. S₀ = 23 X = 20 r_c = 0.09 T = 0.5 $\sigma$ ²= 0.15 No dividends are expected. Use this information to answer questions 1 through 8. -If the actual call price is 3.79,the implied standard deviation is