Question 1

The percentage change in the stock call-option price divided by the percentage change in the stock price is called

Accepted Answer

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) A) and B)
F) A) and C)

Question 2

A put option on the S&P 500 Index will best protect a portfolio

Accepted Answer

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

Question 3

At expiration, the time value of an at-the-money call option is always

Accepted Answer

A)  positive.
B)  equal to zero.
C)  negative.
D)  equal to the stock price minus the exercise price.E) A) and D)
F) A) and C)

Question 4

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call?

Accepted Answer

A)  $8
B)  $12
C)  $6
D)  $4E) A) and D)
F) B) and C)

Question 5

A hedge ratio for a put is always

Accepted Answer

A)  equal to one.
B)  greater than one.
C)  between zero and one.
D)  between negative one and zero.E) B) and C)
F) A) and B)

Question 6

The dollar change in the value of a stock call option is always

Accepted Answer

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) B) and C)
F) A) and D)

Question 7

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

Accepted Answer

A)  positively; positively
B)  negatively; positively
C)  negatively; negatively
D)  positively; negativelyE) All of the above
F) B) and C)

Question 8

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?

Accepted Answer

A)  Portfolio B
B)  Portfolio A
C)  The two portfolios have the same exposure.
D)  Portfolio A if the stock price increases and portfolio B if it decreasesE) B) and C)
F) All of the above

Question 9

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?

Accepted Answer

A)  Portfolio B
B)  Portfolio A
C)  The two portfolios have the same exposure.
D)  Portfolio A if the stock price increases and portfolio B if it decreasesE) C) and D)
F) All of the above

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) C) and E)
G) B) and C)

Question 11

Delta neutral

Accepted Answer

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) B) and C)
F) All of the above

Question 12

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) A) and B)
F) None of the above

Question 13

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 the value of the stock.E) B) and D)
F) A) and C)

Question 14

Which one of the following variables influences the value of put options? I)  Level of interest rates
II)  Time to expiration of the option
III)  Dividend yield of underlying stock
IV)  Stock price volatility

Accepted Answer

A)  I and IV only
B)  II and III only
C)  I, II, and IV only
D)  I, II, III, and IVE) A) and B)
F) A) and D)

Question 15

The intrinsic value of an in-of-the-money call option is equal to

Accepted Answer

A)  the call premium.
B)  zero.
C)  the stock price minus the exercise price.
D)  the striking price.E) None of the above
F) B) and D)

Question 16

A put option has an intrinsic value of zero if the option is

Accepted Answer

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 or out of the money.F) B) and C)
G) A) and B)

Question 17

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

Accepted Answer

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) All of the above
F) B) and D)

Question 18

An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

Accepted Answer

A)  the call price would increase.
B)  the call price would decrease.
C)  the call price would not change.
D)  the put price would decrease.E) A) and D)
F) A) and C)

Question 19

Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

Accepted Answer

A)  The stock price
B)  The time to expiration
C)  The stock volatility
D)  The exercise priceE) A) and B)
F) A) and C)

Question 20

Delta is defined as

Accepted Answer

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 1% change in the value of the underlying asset.
D)  the change in the volatility of the underlying stock price.E) A) and C)
F) B) and C)

Exam 21: Option Valuation

The percentage change in the stock call-option price divided by the percentage change in the stock price is called

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The dollar change in the value of a stock call option is always

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

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At expiration, the time value of an at-the-money call option is always

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A hedge ratio of 0.85 implies that a hedged portfolio should consist of

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A put option has an intrinsic value of zero if the option is

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Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

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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?

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Which one of the following variables influences the value of put options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

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Delta is defined as

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Delta neutral

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An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. What is the time value of the call?

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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

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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?

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A hedge ratio for a put is always

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An American-style call option with six months to maturity has a strike price of $42.The underlying stock now sells for $50.The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

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The intrinsic value of an in-of-the-money call option is equal to

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

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A put option on the S&P 500 Index will best protect a portfolio

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

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

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