Question 1

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

Accepted Answer

A) True 
 B)False

Question 2

The values of u and d are which of the following?

Accepted Answer

A) the return on the stock if it goes up and down,respectively 
B) the inverse of the ratio of the up and down probabilities,respectively,and the risk-free rate 
C) the normal probabilities of up and down movements,respectively 
D) one plus the return on the stock if it goes up and down,respectively 
E) none of the above 
A) the return on the stock if it goes up and down,respectively 
B) the inverse of the ratio of the up and down probabilities,respectively,and the risk-free rate 
C) the normal probabilities of up and down movements,respectively 
D) one plus the return on the stock if it goes up and down,respectively 
E) none of the above

Question 3

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48.Use the model for u that does not require the risk-free rate.

Accepted Answer

A) 1.22 
B) 1.48 
C) 1.40 
D) 1.32 
E) none of the above 
A) 1.22 
B) 1.48 
C) 1.40 
D) 1.32 
E) none of the above

Question 4

In a non-recombining binomial model with n periods,the number of outcomes is 2n.

Accepted Answer

A) True 
 B)False

Question 5

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

Accepted Answer

A) the up and down factors must be increased 
B) the risk-free rate must be increased 
C) the up and down factors and the risk-free rate must be decreased 
D) the initial stock price must be proportionately reduced 
E) none of the above 
A) the up and down factors must be increased 
B) the risk-free rate must be increased 
C) the up and down factors and the risk-free rate must be decreased 
D) the initial stock price must be proportionately reduced 
E) none of the above

Question 8

In a multiperiod binomial model,an arbitrage profit cannot be earned until the option expires.

Accepted Answer

A) True 
 B)False

Question 9

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

Accepted Answer

A) True 
 B)False

Question 10

The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European.

Accepted Answer

A) True 
 B)False

Question 11

When pricing a put with the binomial model,the up and down probabilities are reversed.

Accepted Answer

A) True 
 B)False

Question 12

Determine the value of d for a four period binomial model when the option's life is one-fourth of a year and the volatility is 0.64.Use the model for u and d that does not require the risk-free rate.

Accepted Answer

A) 0.85 
B) 1.17 
C) 2.56 
D) 0.90 
E) none of the above 
A) 0.85 
B) 1.17 
C) 2.56 
D) 0.90 
E) none of the above

Question 13

In a recombining binomial model with n periods,the number of outcomes is n + 1.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements about the binomial option pricing model is not always true?

Accepted Answer

A) it can capture the effect of early exercise 
B) it can accommodate a large number of possible stock prices at expiration 
C) it reflects the effects of the stock price,exercise price,risk-free rate,volatility and time to expiration 
D) it gives the price at which the option will trade in the market. 
E) none of the above 
A) it can capture the effect of early exercise 
B) it can accommodate a large number of possible stock prices at expiration 
C) it reflects the effects of the stock price,exercise price,risk-free rate,volatility and time to expiration 
D) it gives the price at which the option will trade in the market. 
E) none of the above

Question 15

If there is one period remaining and no possibility of the option expiring in-the-money,the hedge ratio will be zero.

Accepted Answer

A) True 
 B)False

Question 16

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions 12 through 15 about a call with an exercise price of 80.
-What would be the call's price if the stock goes up?

Accepted Answer

A) 3.60 
B) 8.00 
C) 5.71 
D) 4.39 
E) none of the above 
A) 3.60 
B) 8.00 
C) 5.71 
D) 4.39 
E) none of the above

Question 17

The binomial model for foreign currency options is similar to the binomial model for stock options except the risk-free discount rate is adjusted.

Accepted Answer

A) True 
 B)False

Question 18

The up and down factors in the binomial model are analogous to the volatility.

Accepted Answer

A) True 
 B)False

Question 19

The binomial probabilities are probabilities if investors were risk neutral.

Accepted Answer

A) True 
 B)False

Question 20

If the number of binomial periods is increased and u,d and r are not adjusted,the value of a European call will increase.

Accepted Answer

A) True 
 B)False

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

The values of u and d are which of the following?

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48.Use the model for u that does not require the risk-free rate.

In a non-recombining binomial model with n periods,the number of outcomes is 2n.

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

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

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

In a multiperiod binomial model,an arbitrage profit cannot be earned until the option expires.

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European.

When pricing a put with the binomial model,the up and down probabilities are reversed.

Determine the value of d for a four period binomial model when the option's life is one-fourth of a year and the volatility is 0.64.Use the model for u and d that does not require the risk-free rate.

In a recombining binomial model with n periods,the number of outcomes is n + 1.

Which of the following statements about the binomial option pricing model is not always true?

If there is one period remaining and no possibility of the option expiring in-the-money,the hedge ratio will be zero.

The binomial model for foreign currency options is similar to the binomial model for stock options except the risk-free discount rate is adjusted.

The up and down factors in the binomial model are analogous to the volatility.

The binomial probabilities are probabilities if investors were risk neutral.

If the number of binomial periods is increased and u,d and r are not adjusted,the value of a European call will increase.

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

Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.

The values of u and d are which of the following?

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48.Use the model for u that does not require the risk-free rate.

In a non-recombining binomial model with n periods,the number of outcomes is 2n.

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

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

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

In a multiperiod binomial model,an arbitrage profit cannot be earned until the option expires.

When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European.

When pricing a put with the binomial model,the up and down probabilities are reversed.

Determine the value of d for a four period binomial model when the option's life is one-fourth of a year and the volatility is 0.64.Use the model for u and d that does not require the risk-free rate.

In a recombining binomial model with n periods,the number of outcomes is n + 1.

Which of the following statements about the binomial option pricing model is not always true?

If there is one period remaining and no possibility of the option expiring in-the-money,the hedge ratio will be zero.

The binomial model for foreign currency options is similar to the binomial model for stock options except the risk-free discount rate is adjusted.

The up and down factors in the binomial model are analogous to the volatility.

The binomial probabilities are probabilities if investors were risk neutral.

If the number of binomial periods is increased and u,d and r are not adjusted,the value of a European call will increase.

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