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Exam 16: Option Valuation

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Question 51

Multiple Choice

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A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

A) $0
B) $1.25
C) $4
D) $5.25

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

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Question 52

Multiple Choice

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Given a stock price of $18, an exercise price of $20, and an interest rate of 7%, what are the intrinsic values which will occur for a one-period binomial option model if the stock price goes up to $23 or down to $16?

A) $3 and $0
B) $3 and −$4
C) $4 and $3
D) $4 and $2

E) None of the above
F) All of the above

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Question 53

Multiple Choice

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Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will ________ and the value of investor B's position will ________.

Calculate the price of a call option using the Black Scholes model and the following data: stock price = $47.30, exercise price = $50, time to expiration = 85 days, risk-free rate = 3%, standard deviation = 35%.

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

You would like to hold 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?

Research suggests that the performance of the Black-Scholes option-pricing model has ________.

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 ________.

You would like to hold 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?

The value of a put option increases with all of the following except ________.