Question 1

Selling an option is generally more valuable than exercising the option because of the option's:

Accepted Answer

A)  riskless value.
B)  intrinsic value.
C)  standard deviation.
D)  exercise price.
E)  time premium.F) A) and C)
G) None of the above

Question 2

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Accepted Answer

A)  Change in option value ≈ Change in stock value/Delta
B)  Change in option value ≈ Change in stock value/(1 - Delta) 
C)  Change in option value ≈ Change in stock value/(1 + Delta) 
D)  Change in option value ≈ Change in stock value × (1 - Delta) 
E)  Change in option value ≈ Change in stock value × DeltaF) None of the above
G) C) and D)

Question 3

The seller of a European call option has the:

Accepted Answer

A)  right, but not the obligation, to buy a stock at a specified price on a specified date.
B)  right to buy a stock at a specified price during a specified period of time.
C)  obligation to sell a stock on a specified date but only at the specified price.
D)  obligation to buy a stock some time during a specified period at the specified price.
E)  obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.F) B) and E)
G) A) and B)

Question 4

Which one of the following best defines the primary purpose of a protective put?

Accepted Answer

A)  ensure a maximum purchase price in the future
B)  offset an equivalent call option
C)  limit the downside risk of asset ownership
D)  lock in a risk-free rate of return on a financial asset
E)  increase the upside potential return on an investmentF) C) and D)
G) D) and E)

Question 5

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Accepted Answer

The answer of Identify the five variables that affect the...

Question 6

Put-call parity is defined as the relationship between which of the following variables?
I.risk-free asset
II.underlying stock price
III.call option
IV.put option

Accepted Answer

A)  I and II only
B)  II and III only
C)  II, III, and IV only
D)  I, II, and III only
E)  I, II, III, and IVF) B) and E)
G) B) and C)

Question 7

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

Accepted Answer

A)  put-call parity
B)  covered call
C)  protective put
D)  straddle
E)  strangleF) A) and B)
G) C) and D)

Question 8

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Accepted Answer

A)  $6.67
B)  $7.02
C)  $7.34
D)  $7.71
E)  $7.80F) B) and C)
G) A) and C)

Question 9

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

Accepted Answer

A)  theta.
B)  vega.
C)  rho.
D)  delta.
E)  gamma.F) B) and C)
G) A) and B)

Question 10

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Accepted Answer

A)  American delta
B)  American call
C)  American put
D)  European put
E)  European callF) B) and D)
G) B) and E)

Question 11

Which of the following variables are included in the Black-Scholes call option pricing formula?
I.put premium
II.N(d1) 
III.exercise price
IV.stock price

Accepted Answer

A)  III and IV only
B)  I, II, and IV only
C)  II, III, and IV only
D)  I, III, and IV only
E)  I, II, III, and IVF) A) and B)
G) D) and E)

Question 12

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Accepted Answer

A)  equal to one.
B)  between zero and one.
C)  equal to zero.
D)  between zero and minus one.
E)  equal to minus one.F) All of the above
G) C) and D)

Question 13

To compute the value of a put using the Black-Scholes option pricing model,you:

Accepted Answer

A)  first have to apply the put-call parity relationship.
B)  first have to compute the value of the put as if it is a call.
C)  compute the value of an equivalent call and then subtract that value from one.
D)  compute the value of an equivalent call and then subtract that value from the market price of the stock.
E)  compute the value of an equivalent call and then multiply that value by e-RT.F) B) and C)
G) C) and D)

Question 14

Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

Accepted Answer

A)  sell a put option on BAT stock and invest at the risk-free rate of return
B)  buy both a call option and a put option on BAT stock and also lend out funds at the risk-free rate
C)  sell a put and buy a call on BAT stock as well as invest at the risk-free rate of return
D)  lend out funds at the risk-free rate of return and sell a put option on BAT stock
E)  borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options on BAT stockF) D) and E)
G) All of the above

Question 15

The value of a call option delta is best defined as:

Accepted Answer

A)  between zero and one.
B)  less than zero.
C)  greater than zero.
D)  greater than or equal to zero.
E)  greater than one.F) B) and E)
G) A) and B)

Question 16

The implied standard deviation used in the Black-Scholes option pricing model is:

Accepted Answer

A)  based on historical performance.
B)  a prediction of the volatility of the return on the underlying asset over the life of the option.
C)  a measure of the time decay of an option.
D)  an estimate of the future value of an option given a strike price (
E)  .
E)  a measure of the historical intrinsic value of an option.F) B) and D)
G) A) and C)

Question 17

Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Accepted Answer

A)  3.95 percent
B)  4.21 percent
C)  4.67 percent
D)  5.38 percent
E)  5.57 percentF) C) and E)
G) B) and C)

Question 18

You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

Accepted Answer

A)  $6,000.00
B)  $6,048.50
C)  $6,179.25
D)  $6,202.22
E)  $6,415.69F) B) and C)
G) None of the above

Question 19

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

Accepted Answer

A)  $12,203
B)  $12,245
C)  $12,287
D)  $12,241
E)  $12,367F) A) and D)
G) All of the above

Question 20

Which one of the following statements related to options is correct?

Accepted Answer

A)  American stock options can be exercised but not resold.
B)  A European call is either equal to or less valuable than a comparable American call.
C)  European puts can be resold but can never be exercised.
D)  European options can be exercised on any dividend payment date.
E)  American options are valued using the Black-Scholes option pricing model.F) B) and D)
G) B) and E)

Exam 25: Option Valuation

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

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Put-call parity is defined as the relationship between which of the following variables? I.risk-free asset II.underlying stock price III.call option IV.put option

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You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

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Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d1) III.exercise price IV.stock price

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Which one of the following defines the relationship between the value of an option and the option's time to expiration?

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Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

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Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

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The value of a call option delta is best defined as:

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To compute the value of a put using the Black-Scholes option pricing model,you:

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Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

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The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

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Which one of the following best defines the primary purpose of a protective put?

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The seller of a European call option has the:

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Which one of the following statements related to options is correct?

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Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

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Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

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A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

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The implied standard deviation used in the Black-Scholes option pricing model is:

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Selling an option is generally more valuable than exercising the option because of the option's:

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Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

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Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d₁) III.exercise price IV.stock price

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