Question 1

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Accepted Answer

A)  risk-free rate
B)  strike price
C)  standard deviation
D)  stock price
E)  life of the optionF) A) and E)
G) A) and B)

Question 2

The sensitivity of an option's value to a change in the risk-free rate 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 C)

Question 3

Which of the following affect the value of a call option?
I. strike price
II. time to maturity
III. standard deviation of the returns on a risk-free asset
IV. risk-free rate

Accepted Answer

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

Question 4

In the Black-Scholes model, the symbol "  σ\sigmaσ " is used to represent the standard deviation of the:

Accepted Answer

A)  option premium on a call with a specified exercise price.
B)  rate of return on the underlying asset.
C)  volatility of the risk-free rate of return.
D)  rate of return on a risk-free asset.
E)  option premium on a put with a specified exercise price. F) C) and D)
G) A) and D)

Question 5

What is the value of a 6-month put with a strike price of $27.50 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)  $6.71
B)  $6.88
C)  $7.24
D)  $7.38
E)  $7.62F) A) and E)
G) B) and E)

Question 6

The value of an option is equal to the:

Accepted Answer

A)  intrinsic value minus the time premium.
B)  time premium plus the intrinsic value.
C)  implied standard deviation plus the intrinsic value.
D)  summation of the intrinsic value, the time premium, and the implied standard deviation.
E)  summation of delta, theta, vega, and rho.F) B) and E)
G) B) and D)

Question 7

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) A) and D)
G) D) and E)

Question 8

A stock is currently selling for $55 a share. The risk-free rate is 4 percent and the standard deviation is 18 percent. What is the value of d1 of a 9-month call option with a strike price of $57.50?

Accepted Answer

A)  -0.01506
B)  -0.01477
C)  -0.00574
D)  0.00042
E)  0.00181F) None of the above
G) B) and C)

Question 9

Today, you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset which pays 3.5 percent interest. The cost of the call is $1.40 per share and the amount invested in the risk-free asset is $26.57. How much total profit will you earn on these purchases if the stock has a market price of $29 one year from now?

Accepted Answer

A)  $0.10
B)  $0.85
C)  $1.03
D)  $1.11
E)  $1.17F) B) and E)
G) A) and B)

Question 10

What is the value of d2 given the following information on a stock? 2 given the following information on a stock?   A) 0.0518 B) 0.0525 C) 0.0533 D) 0.0535 E) 0.0540" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  0.0518
B)  0.0525
C)  0.0533
D)  0.0535
E)  0.0540F) A) and C)
G) B) and D)

Question 11

A decrease in which of the following will increase the value of a put option on a stock?
I. time to expiration
II. stock price
III. exercise price
IV. risk-free rate

Accepted Answer

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

Question 12

What is the delta of a put option given the following information?

Accepted Answer

A)  -0.685
B)  -0.315
C)  0.315
D)  0.525
E)  0.685F) A) and B)
G) B) and E)

Question 13

The current market value of the assets of Smethwell, Inc. is $56 million, with a standard deviation of 16 percent per year. The firm has zero-coupon bonds outstanding with a total face value of $40 million. These bonds mature in 2 years. The risk-free rate is 4.5 percent per year compounded continuously. What is the value of d1?

Accepted Answer

A)  1.67
B)  1.84
C)  1.93
D)  2.00
E)  2.06F) A) and E)
G) B) and D)

Question 14

Pure financial mergers:

Accepted Answer

A)  are beneficial to stockholders.
B)  are beneficial to both stockholders and bondholders.
C)  are detrimental to stockholders.
D)  add value to both the total assets and the total equity of a firm.
E)  reduce both the total assets and the total equity of a firm.F) A) and B)
G) C) and E)

Question 15

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Accepted Answer

Because equity can be viewed as a call o...

Question 16

Today, you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest. The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46. What is the most you can lose on these purchases over the next year?

Accepted Answer

A)  -$1.85
B)  -$0.31
C)  $0
D)  $0.42
E)  $1.54F) B) and E)
G) A) and E)

Question 17

You invest $4,000 today at 6.5 percent, compounded continuously. How much will this investment be worth 8 years from now?

Accepted Answer

A)  $6,620
B)  $6,728
C)  $7,311
D)  $7,422
E)  $7,791F) A) and B)
G) A) and E)

Question 18

Under European put-call parity, the present value of the strike price is equivalent to:

Accepted Answer

A)  the current value of the stock minus the call premium.
B)  the market value of the stock plus the put premium.
C)  the present value of a government coupon bond with a face value equal to the strike price.
D)  a U.S.Treasury bill with a face value equal to the strike price.
E)  a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.F) B) and E)
G) B) and D)

Question 19

Which of the following statements are correct?
I. As the standard deviation of the returns on a stock increase, the value of a put option increases.
II. The value of a call option decreases as the time to expiration increases.
III. A decrease in the risk-free rate increases the value of a put option.
IV. Increasing the strike price increases the value of a put option.

Accepted Answer

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

Question 20

What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)  $3.38
B)  $3.42
C)  $3.68
D)  $4.27
E)  $4.53F) None of the above
G) B) and E)

Exam 25: Option Valuation

Correct Answer
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A decrease in which of the following will increase the value of a put option on a stock? I. time to expiration II. stock price III. exercise price IV. risk-free rate

Correct Answer
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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

Correct Answer
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What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Correct Answer
verified

Pure financial mergers:

Correct Answer
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Which of the following affect the value of a call option? I. strike price II. time to maturity III. standard deviation of the returns on a risk-free asset IV. risk-free rate

Correct Answer
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Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Correct Answer
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Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Correct Answer
verified
Because equity can be viewed as a call o...
View Answer

Under European put-call parity, the present value of the strike price is equivalent to:

Correct Answer
verified

You invest $4,000 today at 6.5 percent, compounded continuously. How much will this investment be worth 8 years from now?

Correct Answer
verified

Correct Answer
verified

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Correct Answer
verified

Correct Answer
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What is the value of a 6-month put with a strike price of $27.50 given the Black-Scholes option pricing model and the following information?

Correct Answer
verified

What is the value of d₂ given the following information on a stock?

Correct Answer
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A stock is currently selling for $55 a share. The risk-free rate is 4 percent and the standard deviation is 18 percent. What is the value of d₁ of a 9-month call option with a strike price of $57.50?

Correct Answer
verified

What is the delta of a put option given the following information?

Correct Answer
verified

Correct Answer
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In the Black-Scholes model, the symbol " $\sigma$ " is used to represent the standard deviation of the:

Correct Answer
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The value of an option is equal to the:

Correct Answer
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Exam 25: Option Valuation

Correct AnswerverifiedShow Answer

A decrease in which of the following will increase the value of a put option on a stock? I. time to expiration II. stock price III. exercise price IV. risk-free rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

Pure financial mergers:

Correct AnswerverifiedShow Answer

Which of the following affect the value of a call option? I. strike price II. time to maturity III. standard deviation of the returns on a risk-free asset IV. risk-free rate

Correct AnswerverifiedShow Answer

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Correct AnswerverifiedShow Answer

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Correct AnswerverifiedBecause equity can be viewed as a call o...View AnswerShow Answer

Under European put-call parity, the present value of the strike price is equivalent to:

Correct AnswerverifiedShow Answer

You invest $4,000 today at 6.5 percent, compounded continuously. How much will this investment be worth 8 years from now?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the value of a 6-month put with a strike price of $27.50 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

What is the value of d2 given the following information on a stock?

Correct AnswerverifiedShow Answer

A stock is currently selling for $55 a share. The risk-free rate is 4 percent and the standard deviation is 18 percent. What is the value of d1 of a 9-month call option with a strike price of $57.50?

Correct AnswerverifiedShow Answer

What is the delta of a put option given the following information?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In the Black-Scholes model, the symbol " σ\sigmaσ " is used to represent the standard deviation of the:

Correct AnswerverifiedShow Answer

The value of an option is equal to the:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Because equity can be viewed as a call o...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

What is the value of d₂ given the following information on a stock?

Correct Answer
verified

A stock is currently selling for $55 a share. The risk-free rate is 4 percent and the standard deviation is 18 percent. What is the value of d₁ of a 9-month call option with a strike price of $57.50?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

In the Black-Scholes model, the symbol " $\sigma$ " is used to represent the standard deviation of the:

Correct Answer
verified

Correct Answer
verified