Question 1

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20, 2009. 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) None of the above
G) A) and B)

Question 2

A purely financial merger:

Accepted Answer

A)  increases the risk that the merged firm will default on its debt obligations.
B)  has no effect on the risk level of the firm's debt.
C)  reduces the value of the option to go bankrupt.
D)  has no effect on the equity value of a firm.
E)  reduces the risk level of the firm and increases the value of the firm's equity.F) B) and C)
G) C) and D)

Question 3

Given the (1)  exercise price E, (2)  time to maturity T, and (3)  European put-call parity, the present value of E plus the value of the call option is equal to the:

Accepted Answer

A)  current market value of the stock.
B)  present value of the stock minus the value of the put.
C)  value of the put minus the market value of the stock.
D)  value of a risk-free asset.
E)  stock value plus the put value.F) A) and B)
G) All of the above

Question 4

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Accepted Answer

A)  sale of a European call option
B)  sale of an American put option
C)  purchase of a protective put
D)  purchase of a protective call
E)  either the sale or purchase of a putF) C) and D)
G) A) and B)

Question 5

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) None of the above

Question 6

Grocery Express stock is selling for $22 a share. A 3-month, $20 call on this stock is priced at $2.65. Risk-free assets are currently returning 0.2 percent per month. What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Accepted Answer

A)  $0.37
B)  $0.53
C)  $0.67
D)  $1.10
E)  $1.18F) A) and E)
G) A) and D)

Question 7

Assume the price of the underlying stock decreases. How will the values of the options respond to this change?
I. call value decreases
II. call value increases
III. put value decreases
IV. put value increases

Accepted Answer

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

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) A) and C)
G) None of the above

Question 9

Given the following information, what is the value of d2 as it is used in the Black-Scholes option pricing model? 2 as it is used in the Black-Scholes option pricing model?   A) -1.1346 B) -0.8657 C) -0.8241 D) -0.7427 E) -0.7238" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  -1.1346
B)  -0.8657
C)  -0.8241
D)  -0.7427
E)  -0.7238F) B) and C)
G) A) and E)

Question 10

The Black-Scholes option pricing model can be used for:

Accepted Answer

A)  American options but not European options.
B)  European options but not American options.
C)  call options but not put options.
D)  put options but not call options.
E)  both zero coupon bonds and coupon bonds.F) B) and C)
G) A) and E)

Question 11

Which one of the following can be used to replicate a protective put strategy?

Accepted Answer

A)  riskless investment and stock purchase
B)  stock purchase and call option
C)  call option and riskless investment
D)  riskless investment
E)  call option, stock purchase, and riskless investmentF) B) and C)
G) C) and E)

Question 12

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today. The annual percentage rate applicable to her investment is 6.8 percent. Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Accepted Answer

A)  annual
B)  daily
C)  quarterly
D)  monthly
E)  continuousF) C) and E)
G) B) and E)

Question 13

A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the standard deviation is 27 percent. What is the value of d1 of a 9-month call option with a strike price of $40?

Accepted Answer

A)  -0.21872
B)  -0.21179
C)  -0.21047
D)  -0.20950
E)  -0.20356F) All of the above
G) C) and D)

Question 14

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  ≈\approx≈ Change in stock value/Delta
B)  Change in option value  ≈\approx≈ Change in stock value/(1 - Delta) 
C)  Change in option value  ≈\approx≈ Change in stock value/(1 + Delta) 
D)  Change in option value  ≈\approx≈  Change in stock value * (1 - Delta) 
E)  Change in option value  ≈\approx≈ Change in stock value * Delta F) B) and D)
G) A) and B)

Question 15

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) A) and D)
G) None of the above

Question 16

Frostbite Thermal Wear has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm's assets is $23,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. What is the market value of the firm's equity based on the Black-Scholes model? (Round your answer to the nearest $100.)

Accepted Answer

A)  $6,400
B)  $6,700
C)  $6,900
D)  $7,000
E)  $7,200F) None of the above
G) C) and D)

Question 17

A.K. Scott's stock is selling for $38 a share. A 3-month call on this stock with a strike price of $35 is priced at $3.40. Risk-free assets are currently returning 0.18 percent per month. What is the price of a 3-month put on this stock with a strike price of $35?

Accepted Answer

A)   $0.21
B)   $0.49
C)   $4.99
D)   $5.85
E)   $6.20F) B) and E)
G) A) and E)

Question 18

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)  $0.57
B)  $0.63
C)  $0.91
D)  $1.36
E)  $1.54F) B) and E)
G) A) and D)

Question 19

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 D)
G) A) and E)

Question 20

Assume the standard deviation of the returns on ABC stock increases. The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Accepted Answer

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

Exam 25: Option Valuation

Correct Answer
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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?

Correct Answer
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A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the standard deviation is 27 percent. What is the value of d₁ of a 9-month call option with a strike price of $40?

Correct Answer
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Grocery Express stock is selling for $22 a share. A 3-month, $20 call on this stock is priced at $2.65. Risk-free assets are currently returning 0.2 percent per month. What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Correct Answer
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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?

Correct Answer
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What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Correct Answer
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Given the following information, what is the value of d₂ as it is used in the Black-Scholes option pricing model?

Correct Answer
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A.K. Scott's stock is selling for $38 a share. A 3-month call on this stock with a strike price of $35 is priced at $3.40. Risk-free assets are currently returning 0.18 percent per month. What is the price of a 3-month put on this stock with a strike price of $35?

Correct Answer
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Which one of the following can be used to replicate a protective put strategy?

Correct Answer
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Given the (1) exercise price E, (2) time to maturity T, and (3) European put-call parity, the present value of E plus the value of the call option is equal to the:

Correct Answer
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Assume the price of the underlying stock decreases. How will the values of the options respond to this change? I. call value decreases II. call value increases III. put value decreases IV. put value increases

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
verified

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Correct Answer
verified

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

Correct Answer
verified

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20, 2009. Which one of the following did Amy purchase?

Correct Answer
verified

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today. The annual percentage rate applicable to her investment is 6.8 percent. Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Correct Answer
verified

A purely financial merger:

Correct Answer
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Assume the standard deviation of the returns on ABC stock increases. The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Correct Answer
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The Black-Scholes option pricing model can be used for:

Correct Answer
verified

Exam 25: Option Valuation

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the standard deviation is 27 percent. What is the value of d1 of a 9-month call option with a strike price of $40?

Correct AnswerverifiedShow Answer

Grocery Express stock is selling for $22 a share. A 3-month, $20 call on this stock is priced at $2.65. Risk-free assets are currently returning 0.2 percent per month. What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

Given the following information, what is the value of d2 as it is used in the Black-Scholes option pricing model?

Correct AnswerverifiedShow Answer

A.K. Scott's stock is selling for $38 a share. A 3-month call on this stock with a strike price of $35 is priced at $3.40. Risk-free assets are currently returning 0.18 percent per month. What is the price of a 3-month put on this stock with a strike price of $35?

Correct AnswerverifiedShow Answer

Which one of the following can be used to replicate a protective put strategy?

Correct AnswerverifiedShow Answer

Given the (1) exercise price E, (2) time to maturity T, and (3) European put-call parity, the present value of E plus the value of the call option is equal to the:

Correct AnswerverifiedShow Answer

Assume the price of the underlying stock decreases. How will the values of the options respond to this change? I. call value decreases II. call value increases III. put value decreases IV. put value increases

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20, 2009. Which one of the following did Amy purchase?

Correct AnswerverifiedShow Answer

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today. The annual percentage rate applicable to her investment is 6.8 percent. Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Correct AnswerverifiedShow Answer

A purely financial merger:

Correct AnswerverifiedShow Answer

Assume the standard deviation of the returns on ABC stock increases. The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Correct AnswerverifiedShow Answer

The Black-Scholes option pricing model can be used for:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the standard deviation is 27 percent. What is the value of d₁ of a 9-month call option with a strike price of $40?

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Given the following information, what is the value of d₂ as it is used in the Black-Scholes option pricing model?

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