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Option Valuation

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Question 1
Free
Multiple Choice

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?

Choose correct answer/s
A

put-call parity

B

covered call

C

protective put

D

straddle

E

strangle

Check answer
Question 2
Free
Multiple Choice

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

Choose correct answer/s
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 IV

Check answer
Question 3
Free
Multiple Choice

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Choose correct answer/s
A

theta

B

vega

C

rho

D

delta

E

gamma

Check answer
Question 4
Free
Multiple Choice

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

Choose correct answer/s
A

theta.

B

vega.

C

rho.

D

delta.

E

gamma.

Check answer
Question 5
Free
Multiple Choice

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?

Choose correct answer/s
A

theta.

B

vega.

C

rho.

D

delta.

E

gamma.

Check answer
Question 6
Multiple Choice

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

Choose correct answer/s
A
theta.
B
vega.
C
rho.
D
delta.
E
gamma.
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Question 7
Multiple Choice

The implied volatility of the returns on the underlying asset that is computed using the Black-Scholes option pricing model is referred to as which one of the following?

Choose correct answer/s
A
residual error
B
implied mean return
C
derived case volatility (DCV)
D
forecast rho
E
implied standard deviation (ISD)
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Question 8
Multiple Choice

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?

Choose correct answer/s
A
American delta
B
American call
C
American put
D
European put
E
European call
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Question 9
Multiple Choice

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Choose correct answer/s
A
American call
B
European call
C
American put
D
European put
E
either an American or a European put
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Question 10
Multiple Choice

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

Choose correct answer/s
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 investment
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Question 11
Multiple Choice

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

Choose correct answer/s
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 put
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Question 12
Multiple Choice

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

Choose correct answer/s
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 investment
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Question 13
Multiple Choice

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:

Choose correct answer/s
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.
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Question 14
Multiple Choice

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

Choose correct answer/s
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 stock
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Question 15
Multiple Choice

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

Choose correct answer/s
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.
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Question 16
Multiple Choice

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?

Choose correct answer/s
A
annual
B
daily
C
quarterly
D
monthly
E
continuous
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Question 17
Multiple Choice

The seller of a European call option has the:

Choose correct answer/s
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.
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Question 18
Multiple Choice

In the Black-Scholes option pricing formula,N(d1)is the probability that a standardized,normally distributed random variable is:

Choose correct answer/s
A
less than or equal to N(d2).
B
less than one.
C
equal to one.
D
equal to d1.
E
less than or equal to d1.
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Question 19
Multiple Choice

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

Choose correct answer/s
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.
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Question 20
Multiple Choice

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

Choose correct answer/s
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 IV
To unlock the question