Question 1

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

Accepted Answer

A) True 
 B)False  False

Question 2

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

Accepted Answer

A) True 
 B)False  True

Question 3

All of the following are variables used to determine a call option's price except

Accepted Answer

A) the risk-free rate 
B) the probability of stock price movement 
C) the exercise price 
D) the possible future stock prices at expiration 
E) none of the above 
A) the risk-free rate 
B) the probability of stock price movement 
C) the exercise price 
D) the possible future stock prices at expiration 
E) none of the above B

Question 4

One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors.

Accepted Answer

A) True 
 B)False

Question 5

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Accepted Answer

A) True 
 B)False

Question 6

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18.
-What is the hedge ratio if the stock goes down one period?

Accepted Answer

A) 0.00 
B) 0.0725 
C) 1.00 
D) 0.73 
E) none of the above 
A) 0.00 
B) 0.0725 
C) 1.00 
D) 0.73 
E) none of the above

Question 7

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

Accepted Answer

A) European calls and European puts 
B) European calls and American puts 
C) American puts and European puts 
D) American puts and European calls 
E) none of the above 
A) European calls and European puts 
B) European calls and American puts 
C) American puts and European puts 
D) American puts and European calls 
E) none of the above

Question 8

If a call is overpriced and you buy the call and sell short the stock,it is equivalent to investing money at less than the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 9

Put-call parity holds within a two period binomial model.

Accepted Answer

A) True 
 B)False

Question 10

In the binomial model,if a call is overpriced,investors should sell it and buy stock.

Accepted Answer

A) True 
 B)False

Question 11

In a non-recombining tree,the number of paths that will occur after three periods is

Accepted Answer

A) three 
B) four 
C) ten 
D) eight 
E) six 
A) three 
B) four 
C) ten 
D) eight 
E) six

Question 12

In a two-period binomial world,a mispriced call will lead to an arbitrage profit if

Accepted Answer

A) the proper hedge ratio is maintained over the two periods 
B) the hedge portfolio is terminated after one period 
C) the option goes from over- to underpriced or vice versa 
D) the option remains mispriced over both periods 
E) none of the above 
A) the proper hedge ratio is maintained over the two periods 
B) the hedge portfolio is terminated after one period 
C) the option goes from over- to underpriced or vice versa 
D) the option remains mispriced over both periods 
E) none of the above

Question 13

The binomial model assumes that investors are risk neutral.

Accepted Answer

A) True 
 B)False

Question 14

A stock priced at 50 can go up or down by 10 percent over two periods.The risk-free rate is 4 percent.Which of the following is the correct price of an American put with an exercise price of 55?

Accepted Answer

A) 7.88 
B) 3.38 
C) 4.00 
D) 5.00 
E) 1.65 
A) 7.88 
B) 3.38 
C) 4.00 
D) 5.00 
E) 1.65

Question 15

When the number of time periods in a binomial model is large,what happens to the binomial probability of an up move?

Accepted Answer

A) it approaches 1.0 
B) it approaches zero 
C) it fluctuates without pattern 
D) it converges to 0.5 
E) none of the above 
A) it approaches 1.0 
B) it approaches zero 
C) it fluctuates without pattern 
D) it converges to 0.5 
E) none of the above

Question 16

Which of the following statements about the binomial model is incorrect?

Accepted Answer

A) it converges to the Black-Scholes-Merton model 
B) it can accommodate early exercise 
C) it allows only two stock prices at expiration 
D) it can be extended to a large number of time periods 
E) none of the above 
A) it converges to the Black-Scholes-Merton model 
B) it can accommodate early exercise 
C) it allows only two stock prices at expiration 
D) it can be extended to a large number of time periods 
E) none of the above

Question 17

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18.
-What is the value of the call if the stock goes up,then down?

Accepted Answer

A) 0.96 
B) 16.80 
C) 8.00 
D) 0.00 
E) none of the above 
A) 0.96 
B) 16.80 
C) 8.00 
D) 0.00 
E) none of the above

Question 18

The binomial option pricing formula is based on the weighted average of the next two possible values,discounted back to the present.

Accepted Answer

A) True 
 B)False

Question 19

If the stock pays a specific dollar dividend and the stock price,to include the dividend,follows the binomial up and down factors,which of the following will happen?

Accepted Answer

A) the binomial tree will recombine 
B) the binomial tree will not recombine 
C) the option will be mispriced 
D) an arbitrage profit will not be possible 
E) none of the above 
A) the binomial tree will recombine 
B) the binomial tree will not recombine 
C) the option will be mispriced 
D) an arbitrage profit will not be possible 
E) none of the above

Question 20

A portfolio that combines the underlying stock and a short position in an option is called

Accepted Answer

A) a risk arbitrage portfolio 
B) a hedge portfolio 
C) a ratio portfolio 
D) a two-state portfolio 
E) none of the above 
A) a risk arbitrage portfolio 
B) a hedge portfolio 
C) a ratio portfolio 
D) a two-state portfolio 
E) none of the above

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

All of the following are variables used to determine a call option's price except

One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors.

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18. -What is the hedge ratio if the stock goes down one period?

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

If a call is overpriced and you buy the call and sell short the stock,it is equivalent to investing money at less than the risk-free rate.

Put-call parity holds within a two period binomial model.

In the binomial model,if a call is overpriced,investors should sell it and buy stock.

In a non-recombining tree,the number of paths that will occur after three periods is

In a two-period binomial world,a mispriced call will lead to an arbitrage profit if

The binomial model assumes that investors are risk neutral.

A stock priced at 50 can go up or down by 10 percent over two periods.The risk-free rate is 4 percent.Which of the following is the correct price of an American put with an exercise price of 55?

When the number of time periods in a binomial model is large,what happens to the binomial probability of an up move?

Which of the following statements about the binomial model is incorrect?

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18. -What is the value of the call if the stock goes up,then down?

The binomial option pricing formula is based on the weighted average of the next two possible values,discounted back to the present.

If the stock pays a specific dollar dividend and the stock price,to include the dividend,follows the binomial up and down factors,which of the following will happen?

A portfolio that combines the underlying stock and a short position in an option is called

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Black-Scholes-Merton 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 4: Option Pricing Models: the Binomial Model

When calls are sold to adjust the hedge ratio,the funds must be placed in additional shares.

The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.

All of the following are variables used to determine a call option's price except

One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors.

If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18. -What is the hedge ratio if the stock goes down one period?

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

If a call is overpriced and you buy the call and sell short the stock,it is equivalent to investing money at less than the risk-free rate.

Put-call parity holds within a two period binomial model.

In the binomial model,if a call is overpriced,investors should sell it and buy stock.

In a non-recombining tree,the number of paths that will occur after three periods is

In a two-period binomial world,a mispriced call will lead to an arbitrage profit if

The binomial model assumes that investors are risk neutral.

A stock priced at 50 can go up or down by 10 percent over two periods.The risk-free rate is 4 percent.Which of the following is the correct price of an American put with an exercise price of 55?

When the number of time periods in a binomial model is large,what happens to the binomial probability of an up move?

Which of the following statements about the binomial model is incorrect?

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18. -What is the value of the call if the stock goes up,then down?

The binomial option pricing formula is based on the weighted average of the next two possible values,discounted back to the present.

If the stock pays a specific dollar dividend and the stock price,to include the dividend,follows the binomial up and down factors,which of the following will happen?

A portfolio that combines the underlying stock and a short position in an option is called

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: the Black-Scholes-Merton 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