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Exam 16: Option Valuation

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Question 31

Multiple Choice

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A call option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _____ intrinsic value and _____ time value.

A) negative; positive
B) positive; negative
C) zero; zero
D) zero; positive

E) C) and D)
F) A) and B)

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Question 32

Multiple Choice

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You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. -Suppose the desired put options with X = 50 were traded.How much would it cost to purchase?

A) $1.19
B) $2.38
C) $5.00
D) $3.33

E) B) and D)
F) A) and C)

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Question 33

Multiple Choice

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Investor A bought a call option and Investor B bought a put option.All else equal if the underlying stock price volatility increases the value of Investor A's position will ______ and the value of Investor B's position will _______.

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. -Using the Black-Scholes OPM,the put option should be worth __________ today.

The stock price of Atlantis Corp.is $43 today.The risk-free rate of return is 10% and Atlantis Corp.pays no dividends.A call option on Atlantis Corp.stock with an exercise price of $40 and an expiration date six months from now is worth $5.00 today.A put option on Atlantis Corp.stock with an exercise price of $40 and an expiration date six months from now should be worth __________ today.

The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called _________.

What would have been the cost of a protective put portfolio?

You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. -Suppose the desired put options with X = 50 were traded.What would be the hedge ratio for the option?

Investor A bought a call option that expires in 6 months.Investor B wrote a put option with a 9 month maturity.All else equal as the time to expiration approaches the value of Investor A's position will _______ and the value of Investor B's position will _______.

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?

You are considering purchasing a put option on a stock with a current price of $33.The exercise price is $35,and the price of the corresponding call option is $2.25.According to the put-call parity theorem,if the risk-free rate of interest is 4%,and there are 90 days until expiration,the value of the put should be ____________.

If you know that a call option will be profitably exercised then the Black-Scholes model price will simplify to _______.

The stock price of Harper Corp.is $33 today.The risk-free rate of return is 6% and Harper Corp.pays no dividends.A put option on Harper Corp.stock with an exercise price of $30 and an expiration date 73 days from now is worth $0.95 today.A call option on Harper Corp.stock with an exercise price of $30 and the same expiration date should be worth __________ today.

The intrinsic value of an out of the money call option ___________.

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends but the actual call price is $3.75.The most likely explanation for the discrepancy is that either the option is _________ or the volatility you input into the model is too _________.

A call option on Juniper Corp.stock with an exercise price of $75 and an expiration date one year from now is worth $3.00 today.A put option on Juniper Corp.stock with an exercise price of $75 and an expiration date one year from now is worth $2.50 today.The risk-free rate of return is 8% and Juniper Corp.pays no dividends.The stock should be worth __________ today.

You are considering purchasing a call option with a strike price of $35.The price of the underlying stock is currently $27.Without any further information,you would expect the hedge ratio for this option to be _______________.

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium,that standard deviation would be called the _______.

The delta of a put option on a stock is always __________.