Chapter 21 Option Valuation

Chapter 21 - Option Valuation

Chapter 21

Option Valuation

Multiple Choice Questions

1.Before expiration, the time value of an in the money call option is always
A.equal to zero.
B.positive.
C.negative.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

2.Before expiration, the time value of an in the money put option is always
A.equal to zero.
B.negative.
C.positive.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

3.Before expiration, the time value of an at the money call option is always
A.positive.
B.equal to zero.
C.negative.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

4.Before expiration, the time value of an at the money put option is always
A.equal to zero.
B.equal to the stock price minus the exercise price.
C.negative.
D.positive.
E.None of these is correct.

5.At expiration, the time value of an in the money call option is always
A.equal to zero.
B.positive.
C.negative.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

6.At expiration, the time value of an in the money put option is always
A.equal to zero.
B.negative.
C.positive.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

7.At expiration, the time value of an at the money call option is always
A.positive.
B.equal to zero.
C.negative.
D.equal to the stock price minus the exercise price.
E.None of these is correct.

8.At expiration, the time value of an at the money put option is always
A.equal to zero.
B.equal to the stock price minus the exercise price.
C.negative.
D.positive.
E.None of these is correct.

9.A call option has an intrinsic value of zero if the option is
A.at the money.
B.out of the money.
C.in the money.
D.at the money and in the money.
E.at the money and out of the money.

10.A put option has an intrinsic value of zero if the option is
A.at the money.
B.out of the money.
C.in the money.
D.at the money and in the money.
E.at the money and out of the money.

11.Prior to expiration
A.the intrinsic value of a call option is greater than its actual value.
B.the intrinsic value of a call option is always positive.
C.the actual value of a call option is greater than the intrinsic value.
D.the intrinsic value of a call option is always greater than its time value.
E.None of these is correct.

12.Prior to expiration
A.the intrinsic value of a put option is greater than its actual value.
B.the intrinsic value of a put option is always positive.
C.the actual value of a put option is greater than the intrinsic value.
D.the intrinsic value of a put option is always greater than its time value.
E.None of these is correct.

13.If the stock price increases, the price of a put option on that stock ______and that of a call option ______.
A.decreases; increases
B.decreases; decreases
C.increases; decreases
D.increases; increases
E.does not change; does not change

14.If the stock price decreases, the price of a put option on that stock ______and that of a call option ______.
A.decreases; increases
B.decreases; decreases
C.increases; decreases
D.increases; increases
E.does not change; does not change

15.Other things equal, the price of a stock call option is positively correlated with the following factors except
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.None of these is correct.

16.Other things equal, the price of a stock call option is positively correlated with the following factors
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.the stock price, the time to expiration, and the stock volatility.

17.Other things equal, the price of a stock call option is negatively correlated with the following factors
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.the stock price, the time to expiration, and the stock volatility.

18.Other things equal, the price of a stock put option is positively correlated with the following factors except
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.None of these is correct.

19.Other things equal, the price of a stock put option is positively correlated with the following factors
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.the time to expiration, the stock volatility, and the exercise price.

20.Other things equal, the price of a stock put option is negatively correlated with the following factors
A.the stock price.
B.the time to expiration.
C.the stock volatility.
D.the exercise price.
E.the time to expiration, the stock volatility, and the exercise price.

21.The price of a stock put option is ______correlated with the stock price and ______correlated with the striking price.
A.positively; positively
B.negatively; positively
C.negatively; negatively
D.positively; negatively
E.not; not

22.The price of a stock call option is ______correlated with the stock price and ______correlated with the striking price.
A.positively; positively
B.negatively; positively
C.negatively; negatively
D.positively; negatively
E.not; not

23.All the inputs in the Black-Scholes Option Pricing Model are directly observable except
A.the price of the underlying security.
B.the risk free rate of interest.
C.the time to expiration.
D.the variance of returns of the underlying asset return.
E.None of these is correct.

24.Which of the inputs in the Black-Scholes Option Pricing Model are directly observable
A.the price of the underlying security.
B.the risk free rate of interest.
C.the time to expiration.
D.the variance of returns of the underlying asset return.
E.the price of the underlying security, the risk free rate of interest, and the time to expiration.

25.Delta is defined as
A.the change in the value of an option for a dollar change in the price of the underlying asset.
B.the change in the value of the underlying asset for a dollar change in the call price.
C.the percentage change in the value of an option for a one percent change in the value of the underlying asset.
D.the change in the volatility of the underlying stock price.
E.None of these is correct.

26.A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A.long 0.70 calls for each short stock.
B.short 0.70 calls for each long stock.
C.long 0.70 shares for each short call.
D.long 0.70 shares for each long call.
E.None of these is correct.

27.A hedge ratio of 0.85 implies that a hedged portfolio should consist of
A.long 0.85 calls for each short stock.
B.short 0.85 calls for each long stock.
C.long 0.85 shares for each short call.
D.long 0.85 shares for each long call.
E.None of these is correct.

28.A hedge ratio for a call option is ______and a hedge ratio for a put option is ______.
A.negative; positive
B.negative; negative
C.positive; negative
D.positive; positive
E.zero; zero

29.A hedge ratio for a call is always
A.equal to one.
B.greater than one.
C.between zero and one.
D.between minus one and zero.
E.of no restricted value.

30.A hedge ratio for a put is always
A.equal to one.
B.greater than one.
C.between zero and one.
D.between minus one and zero.
E.of no restricted value.

31.The dollar change in the value of a stock call option is always
A.lower than the dollar change in the value of the stock.
B.higher than the dollar change in the value of the stock.
C.negatively correlated with the change in the value of the stock.
D.higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.
E.lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

32.The percentage change in the stock call option price divided by the percentage change in the stock price is called
A.the elasticity of the option.
B.the delta of the option.
C.the theta of the option.
D.the gamma of the option.
E.None of these is correct.

33.The elasticity of an option is
A.the volatility level for the stock that the option price implies.
B.the continued updating of the hedge ratio as time passes.
C.the percentage change in the stock call option price divided by the percentage change in the stock price.
D.the sensitivity of the delta to the stock price.
E.volatility level for the stock that the option price implies and the percentage change in the stock call option price divided by the percentage change in the stock price.

34.The elasticity of a stock call option is always
A.greater than one.
B.smaller than one.
C.negative.
D.infinite.
E.None of these is correct.

35.The elasticity of a stock put option is always
A.positive.
B.smaller than one.
C.negative.
D.infinite.
E.None of these is correct.

36.The gamma of an option is
A.the volatility level for the stock that the option price implies.
B.the continued updating of the hedge ratio as time passes.
C.the percentage change in the stock call option price divided by the percentage change in the stock price.
D.the sensitivity of the delta to the stock price.
E.the volatility level for the stock that the option price implies and the percentage change in the stock call option price divided by the percentage change in the stock price.

37.Delta neutral
A.is the volatility level for the stock that the option price implies.
B.is the continued updating of the hedge ratio as time passes.
C.is the percentage change in the stock call option price divided by the percentage change in the stock price.
D.means the portfolio has no tendency to change value as the underlying portfolio value changes.
E.is the volatility level for the stock that the option price implies and is the percentage change in the stock call option price divided by the percentage change in the stock price.

38.Dynamic hedging is
A.the volatility level for the stock that the option price implies.
B.the continued updating of the hedge ratio as time passes.
C.the percentage change in the stock call option price divided by the percentage change in the stock price.
D.the sensitivity of the delta to the stock price.
E.is the volatility level for the stock that the option price implies and is the percentage change in the stock call option price divided by the percentage change in the stock price.

39.Volatility risk is
A.the volatility level for the stock that the option price implies.
B.the risk incurred from unpredictable changes in volatility.
C.the percentage change in the stock call option price divided by the percentage change in the stock price.
D.the sensitivity of the delta to the stock price.
E.is the volatility level for the stock that the option price implies and is the percentage change in the stock call option price divided by the percentage change in the stock price.

40.Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?
A.Portfolio B.
B.Portfolio A.
C.The two portfolios have the same exposure.
D.A if the stock price increases and B if it decreases.
E.B if the stock price decreases and A if it increases.

41.Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B consists of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a change in stock price?
A.Portfolio B.
B.Portfolio A.
C.The two portfolios have the same exposure.
D.A if the stock price increases and B if it decreases.
E.B if the stock price decreases and A if it increases.

42.Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price?
A.Portfolio B.
B.Portfolio A.
C.The two portfolios have the same exposure.
D.A if the stock price increases and B if it decreases.
E.B if the stock price decreases and A if it increases.

43.Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price?
A.Portfolio B.
B.Portfolio A.
C.The two portfolios have the same exposure.
D.A if the stock price increases and B if it decreases.
E.B if the stock price decreases and A if it increases.

44.A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A.+$700
B.+$500
C.−$1,150
D.−$520
E.None of these is correct.

45.A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5. What would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A.+$700
B.−$850
C.−$580
D.−$520
E.None of these is correct.

46.A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A.-$345
B.+$500
C.−$580
D.−$520
E.None of these is correct.