Question 1

Prior to expiration

Accepted Answer

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 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.F) A) and E)
G) B) and D)

Question 2

An American call option buyer on a non-dividend paying stock will

Accepted Answer

A)   always exercise the call as soon as it is in the money.
B)   only exercise the call when the stock price exceeds the previous high
C)   never exercise the call early.
D)   buy an offsetting put whenever the stock price drops below the strike price.
E)   none of these.F) A) and E)
G) A) and C)

Question 3

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Accepted Answer

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.F) A) and C)
G) C) and D)

Question 4

The Black-Scholes formula assumes that
I.the risk-free interest rate is constant over the life of the option.
II.the stock price volatility is constant over the life of the option.
III.the expected rate of return on the stock is constant over the life of the option.
IV.there will be no sudden extreme jumps in stock prices.

Accepted Answer

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

Question 5

The elasticity of a stock call option is always

Accepted Answer

A)   greater than one.
B)   smaller than one.
C)   negative.
D)   infinite.
E)   none of these.F) B) and D)
G) B) and C)

Question 6

A hedge ratio for a call is always

Accepted Answer

A)   equal to one.
B)   greater than one.
C)   between zero and one
D)   between minus one and zero.
E)   of no restricted valueF) B) and E)
G) A) and E)

Question 7

Options sellers who are delta-hedging would most likely

Accepted Answer

A)   sell when markets are falling
B)   buy when markets are rising
C)   both a and b.
D)   sell whether markets are falling or rising.
E)   buy whether markets are falling or rising.F) C) and D)
G) A) and B)

Question 8

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

Accepted Answer

A)   0.60
B)   0.40
C)   -0.60
D)   -0.40
E)   -.17F) C) and E)
G) None of the above

Question 9

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Accepted Answer

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.F) A) and B)
G) C) and E)

Question 10

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

Accepted Answer

A)   portfolio insurance.
B)   rebalancing.
C)   option elasticity.
D)   gamma hedging.
E)   dynamic hedging.F) A) and C)
G) A) and B)

Question 11

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

Accepted Answer

The volatility of the underlying stock i...

Question 12

A put option on the S&P 500 index will best protect ________

Accepted Answer

A)   a portfolio of 100 shares of IBM stock.
B)   a portfolio of 50 bonds.
C)   a portfolio that corresponds to the S&P 500.
D)   a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks.
E)   a portfolio that replicates the Dow.F) A) and E)
G) None of the above

Question 13

If the hedge ratio for a stock call is 0.70,the hedge ratio for a put with the same expiration date and exercise price as the call would be ______.

Accepted Answer

A)   0.70
B)   0.30
C)   -0.70
D)   -0.30
E)   -.17F) None of the above
G) A) and D)

Question 14

As the underlying stock's price increased,the call option valuation function's slope approaches

Accepted Answer

A)   zero.
B)   one.
C)   two times the value of the stock.
D)   one-half time s the value of the stock.
E)   infinityF) B) and C)
G) B) and E)

Question 15

Empirical tests of the Black-Scholes option pricing model

Accepted Answer

A)   show that the model generates values fairly close to the prices at which options trade.
B)   show that the model tends to overvalue deep in the money calls and undervalue deep out of the money calls.
C)   indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
D)   a and c.
E)   a,b,and c.F) C) and E)
G) D) and E)

Question 16

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.

Accepted Answer

A)   positively,positively
B)   negatively,positively
C)   negatively,negatively
D)   positively,negatively
E)   not,notF) D) and E)
G) B) and C)

Question 17

In volatile markets,dynamic hedging may be difficult to implement because

Accepted Answer

A)   prices move too quickly for effective rebalancing.
B)   as volatility increases,historical deltas are too low.
C)   price quotes may be delayed so that correct hedge ratios cannot be computed.
D)   volatile markets may cause trading halts.
E)   all of these.F) A) and E)
G) A) and B)

Exam 18: Performance Evaluation and Active Portfolio Management

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

Correct Answer
verified
The volatility of the underlying stock i...
View Answer

The elasticity of a stock call option is always

Correct Answer
verified

Prior to expiration

Correct Answer
verified

If the hedge ratio for a stock call is 0.70,the hedge ratio for a put with the same expiration date and exercise price as the call would be ______.

Correct Answer
verified

As the underlying stock's price increased,the call option valuation function's slope approaches

Correct Answer
verified

Correct Answer
verified

An American call option buyer on a non-dividend paying stock will

Correct Answer
verified

A put option on the S&P 500 index will best protect ________

Correct Answer
verified

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

Correct Answer
verified

A hedge ratio for a call is always

Correct Answer
verified

In volatile markets,dynamic hedging may be difficult to implement because

Correct Answer
verified

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Correct Answer
verified

Options sellers who are delta-hedging would most likely

Correct Answer
verified

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Correct Answer
verified

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

Correct Answer
verified

The price of a stock put option is correlated with the stock price and correlated with the striking price.

Correct Answer
verified

Empirical tests of the Black-Scholes option pricing model

Correct Answer
verified

Exam 18: Performance Evaluation and Active Portfolio Management

Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?

Correct AnswerverifiedThe volatility of the underlying stock i...View AnswerShow Answer

The elasticity of a stock call option is always

Correct AnswerverifiedShow Answer

Prior to expiration

Correct AnswerverifiedShow Answer

If the hedge ratio for a stock call is 0.70,the hedge ratio for a put with the same expiration date and exercise price as the call would be ______.

Correct AnswerverifiedShow Answer

As the underlying stock's price increased,the call option valuation function's slope approaches

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An American call option buyer on a non-dividend paying stock will

Correct AnswerverifiedShow Answer

A put option on the S&P 500 index will best protect ________

Correct AnswerverifiedShow Answer

Since deltas change as stock values change,portfolio hedge ratios must be constantly updated in active markets.This process is referred to as

Correct AnswerverifiedShow Answer

A hedge ratio for a call is always

Correct AnswerverifiedShow Answer

In volatile markets,dynamic hedging may be difficult to implement because

Correct AnswerverifiedShow Answer

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

Correct AnswerverifiedShow Answer

Options sellers who are delta-hedging would most likely

Correct AnswerverifiedShow Answer

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Correct AnswerverifiedShow Answer

If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be

Correct AnswerverifiedShow Answer

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.

Correct AnswerverifiedShow Answer

Empirical tests of the Black-Scholes option pricing model

Correct AnswerverifiedShow Answer

Correct Answer
verified
The volatility of the underlying stock i...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The price of a stock put option is correlated with the stock price and correlated with the striking price.

Correct Answer
verified

Correct Answer
verified