Question 1

The single period binomial hedge ratio for stock call options could be computed by equating the two future cash flows -- from a portfolio of long h shares of stock and short one call -- and solve for the number of underlying stocks to hold.

Accepted Answer

A) True 
 B)False

Question 2

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 is the hedge ratio?

Accepted Answer

A) 0.429 
B) 0.714 
C) 0.571 
D) 0.823 
E) none of the above

Question 3

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 down?

Accepted Answer

A) 8.00 
B) 3.60 
C) 0.00 
D) 9.00 
E) none of the above

Question 4

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18.
-What is the current value of the call?

Accepted Answer

A) 8.00 
B) 7.30 
C) 11.13 
D) 0.619 
E) none of the above

Question 5

When the number of time periods in a binomial model is large,a European call option value does what?

Accepted Answer

A) fluctuates around its intrinsic value 
B) converges to a specific value 
C) increases without limit 
D) converges to the European lower bound 
E) none of the above

Question 6

Options that can be priced by considering only the payoffs at expiration are called path-independent.

Accepted Answer

A) True 
 B)False

Question 7

In a binomial model,if the call price in the market is higher than the call price given by the model,you should

Accepted Answer

A) sell the call and sell short the stock 
B) buy the call and sell short the stock 
C) buy the stock and sell the call 
D) buy the call and buy the stock 
E) none of the above

Question 8

When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

Accepted Answer

A) True 
 B)False

Question 9

Suppose S = 70,X = 65,r = 0.05,p = 0.6,Cu = 7.17,Cd = 1.22 and there is one period left in an American call's life.What will the option be worth?

Accepted Answer

A) 6.83 
B) 0.00 
C) 4.56 
D) 5.00 
E) none of the above

Question 10

Pricing a put with the binomial model is the same procedure as pricing with a call,except that the

Accepted Answer

A) underlying stock must not pay dividends 
B) binomial model cannot account for expiration payoffs 
C) value of the underlying must be discounted back to the current time period 
D) expiration payoffs reflect the fact that the option is the right to sell the underlying stock 
E) none of the above

Question 11

In a one-period binomial model with Su = 49.5,Sd = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

Accepted Answer

A) 2.17 
B) 0.50 
C) 9.50 
D) 5.00 
E) none of the above

Question 12

If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters,the tree will explode and end up with far more outcomes than time periods.

Accepted Answer

A) True 
 B)False

Question 13

All of the following are practical applications of the binomial model except

Accepted Answer

A) choices regarding real options 
B) options regarding executive incentive plans 
C) models in which the stock price can go up,down,or remain constant in the next period 
D) embedded options within debt securities 
E) none of the above

Question 14

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 is the theoretical value of the call?

Accepted Answer

A) 8.00 
B) 4.39 
C) 5.15 
D) 5.36 
E) none of the above

Question 15

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.

Accepted Answer

A) True 
 B)False

Question 16

When puts are priced with the binomial model,which of the following is true?

Accepted Answer

A) the puts must be American 
B) the puts cannot be properly hedged 
C) the puts will violate put-call parity 
D) the hedge ratio is one throughout the tree 
E) none of the above

Question 17

In the binomial model,if an option has no chance of expiring out-of-the-money,the hedge ratio will be

Accepted Answer

A) 0.5 
B) infinite 
C) 1 
D) 0 
E) none of the above

Question 18

The hedge ratio is the number of shares per call in a risk-free portfolio.

Accepted Answer

A) True 
 B)False

Question 19

The binomial option pricing formula will conform to the European lower bound.

Accepted Answer

A) True 
 B)False

Question 20

The binomial option pricing model will converge to what value as the number of periods increases?

Accepted Answer

A) a random value 
B) the Black-Scholes-Merton value of the option 
C) the intrinsic volatility of the option 
D) the true value of the underlying 
E) none of the above

Exam 4: Option Pricing Models: the Binomial Model

The single period binomial hedge ratio for stock call options could be computed by equating the two future cash flows -- from a portfolio of long h shares of stock and short one call -- and solve for the number of underlying stocks to hold.

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 is the hedge ratio?

Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18. -What is the current value of the call?

When the number of time periods in a binomial model is large,a European call option value does what?

Options that can be priced by considering only the payoffs at expiration are called path-independent.

In a binomial model,if the call price in the market is higher than the call price given by the model,you should

When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

Suppose S = 70,X = 65,r = 0.05,p = 0.6,C_u = 7.17,C_d = 1.22 and there is one period left in an American call's life.What will the option be worth?

Pricing a put with the binomial model is the same procedure as pricing with a call,except that the

In a one-period binomial model with S_u = 49.5,S_d = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?

If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters,the tree will explode and end up with far more outcomes than time periods.

All of the following are practical applications of the binomial model except

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 is the theoretical value of the call?

If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.

When puts are priced with the binomial model,which of the following is true?

In the binomial model,if an option has no chance of expiring out-of-the-money,the hedge ratio will be

The hedge ratio is the number of shares per call in a risk-free portfolio.

The binomial option pricing formula will conform to the European lower bound.

The binomial option pricing model will converge to what value as the number of periods increases?