Question 1

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

Accepted Answer

A) True 
 B)False  False

Question 2

The time value of a call is greatest when the stock price is very high.

Accepted Answer

A) True 
 B)False  False

Question 3

Consider a portfolio consisting of a long call with an exercise price of X,a short position in a non-dividend paying stock at an initial price of S0,and the purchase of riskless bonds with a face value of X and maturing when the call expires.What should such a portfolio be worth?

Accepted Answer

A) C + P - X(1 + r)-T 
B) C - S0 
C) P - X 
D) P + S0 - X(1 + r)-T 
E) none of the above 
A) C + P - X(1 + r)-T 
B) C - S0 
C) P - X 
D) P + S0 - X(1 + r)-T 
E) none of the above E

Question 4

Another expression for intrinsic value is

Accepted Answer

A) parity 
B) parity value 
C) exercise value 
D) all of the above 
E) none of the above 
A) parity 
B) parity value 
C) exercise value 
D) all of the above 
E) none of the above

Question 5

An American call should be exercised early when the stock price is extremely high and is expected to fall.

Accepted Answer

A) True 
 B)False

Question 6

Holding everything else constant,a longer-term European put is always worth more than a shorter-term European put.

Accepted Answer

A) True 
 B)False

Question 7

At expiration the call price must converge to the stock price.

Accepted Answer

A) True 
 B)False

Question 8

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

Accepted Answer

A) True 
 B)False

Question 9

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

Accepted Answer

A) True 
 B)False

Question 10

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.
 
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced.Using put-call parity,what would you expect the stock price to be? For this problem,treat the options as if they were European.

Accepted Answer

A) 113.73 
B) 123.23 
C) 121.23 
D) 112.77 
E) none of the above 
A) 113.73 
B) 123.23 
C) 121.23 
D) 112.77 
E) none of the above

Question 11

The lower the exercise price,the more valuable the call option.

Accepted Answer

A) True 
 B)False

Question 12

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.
 
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-What is the European lower bound of the December 105 call?

Accepted Answer

A) 9.86 
B) 0.00 
C) 8.25 
D) 9.26 
E) none of the above 
A) 9.86 
B) 0.00 
C) 8.25 
D) 9.26 
E) none of the above

Question 13

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.86,and an ask discount of 5.80.What is the best estimate of the risk-free rate as given in the text?

Accepted Answer

A) 5.86 % 
B) 5.83 % 
C) 6.11 % 
D) 6.14 % 
E) none of the above 
A) 5.86 % 
B) 5.83 % 
C) 6.11 % 
D) 6.14 % 
E) none of the above

Question 14

What is the lowest possible value of a European put?

Accepted Answer

A) Max(0,X - S0) 
B) X(1 + r)-T 
C) Max[0,S0 - X(1 + r)-T] 
D) Max[0,X(1 + r)-T - S0)] 
E) none of the above 
A) Max(0,X - S0) 
B) X(1 + r)-T 
C) Max[0,S0 - X(1 + r)-T] 
D) Max[0,X(1 + r)-T - S0)] 
E) none of the above

Question 15

If one portfolio always provides a return at least as high as another portfolio,then that portfolio will have a price no less than that of the other portfolio.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is the lowest possible value of an American call on a stock with no dividends?

Accepted Answer

A) Max[0,S0 - X(1 + r)-T] 
B) S0 
C) Max(0,S0 - X) 
D) Max[0,S0 (1 + r)-T - X] 
E) none of the above 
A) Max[0,S0 - X(1 + r)-T] 
B) S0 
C) Max(0,S0 - X) 
D) Max[0,S0 (1 + r)-T - X] 
E) none of the above

Question 17

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.
 
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-What is the time value of the January 115 call?

Accepted Answer

A) 5.30 
B) 0.00 
C) 3.50 
D) 1.70 
E) none of the above 
A) 5.30 
B) 0.00 
C) 3.50 
D) 1.70 
E) none of the above

Question 18

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.
 
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-The maximum difference between the January 105 and 110 calls is which of the following?

Accepted Answer

A) 11.50 
B) 4.92 
C) 5.00 
D) 4.0 
E) none of the above 
A) 11.50 
B) 4.92 
C) 5.00 
D) 4.0 
E) none of the above

Question 19

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

Accepted Answer

A) True 
 B)False

Question 20

The gain from the early exercise of an American put is X(1 + r)-T - S0.

Accepted Answer

A) True 
 B)False

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

The time value of a call is greatest when the stock price is very high.

Consider a portfolio consisting of a long call with an exercise price of X,a short position in a non-dividend paying stock at an initial price of S₀,and the purchase of riskless bonds with a face value of X and maturing when the call expires.What should such a portfolio be worth?

Another expression for intrinsic value is

An American call should be exercised early when the stock price is extremely high and is expected to fall.

Holding everything else constant,a longer-term European put is always worth more than a shorter-term European put.

At expiration the call price must converge to the stock price.

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

The lower the exercise price,the more valuable the call option.

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.86,and an ask discount of 5.80.What is the best estimate of the risk-free rate as given in the text?

What is the lowest possible value of a European put?

If one portfolio always provides a return at least as high as another portfolio,then that portfolio will have a price no less than that of the other portfolio.

Which of the following is the lowest possible value of an American call on a stock with no dividends?

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.

Introduction

Structure of Options Markets

Option Pricing Models: the Binomial Model

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 3: Principles of Option Pricing

The lower bound of a European call on a non-dividend paying stock is lower than the intrinsic value of an American call.

The time value of a call is greatest when the stock price is very high.

Consider a portfolio consisting of a long call with an exercise price of X,a short position in a non-dividend paying stock at an initial price of S0,and the purchase of riskless bonds with a face value of X and maturing when the call expires.What should such a portfolio be worth?

Another expression for intrinsic value is

An American call should be exercised early when the stock price is extremely high and is expected to fall.

Holding everything else constant,a longer-term European put is always worth more than a shorter-term European put.

At expiration the call price must converge to the stock price.

An option can be priced at less than zero because it can potentially generate a large profit for its owner.

The difference between an American call's price and its intrinsic value is called the time value because the call can be exercised at any time.

The lower the exercise price,the more valuable the call option.

On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.86,and an ask discount of 5.80.What is the best estimate of the risk-free rate as given in the text?

What is the lowest possible value of a European put?

If one portfolio always provides a return at least as high as another portfolio,then that portfolio will have a price no less than that of the other portfolio.

Which of the following is the lowest possible value of an American call on a stock with no dividends?

The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.

The gain from the early exercise of an American put is X(1 + r)-T - S0.

Introduction

Structure of Options Markets

Option Pricing Models: the Binomial Model

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

Consider a portfolio consisting of a long call with an exercise price of X,a short position in a non-dividend paying stock at an initial price of S₀,and the purchase of riskless bonds with a face value of X and maturing when the call expires.What should such a portfolio be worth?

The gain from the early exercise of an American put is X(1 + r)^-T - S₀.