Question 1

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Accepted Answer

An increase in the risk-free rate will i...

Question 2

1 of a 9-month call option with a strike price of $40? A)  -0.21872 B)  -0.21179 C)  -0.21047 D)  -0.20950 E)  -0.20356" class="answers-bank-image d-inline" rel="preload" >
-A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

Accepted Answer

A)   -0.21872
B)   -0.21179
C)   -0.21047
D)   -0.20950
E)   -0.20356F) A) and B)
G) A) and C)

Question 3

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

Accepted Answer

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.F) None of the above
G) C) and D)

Question 4

Which one of the following statements related to the implied standard deviation (ISD) is correct?

Accepted Answer

A)   The ISD is an estimate of the historical standard deviation of the underlying security.
B)   ISD is equal to (1 - D1) .
C)   The ISD estimates the volatility of an option's price over the option's lifespan.
D)   The value of ISD is dependent upon both the risk-free rate and the time to option expiration.
E)   ISD confirms the observable volatility of the return on the underlying security.F) C) and E)
G) B) and D)

Question 5

The seller of a European call option has the:

Accepted Answer

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

Question 6

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?

Accepted Answer

A)   theta.
B)   vega.
C)   rho.
D)   delta.
E)   gamma.F) C) and D)
G) A) and D)

Question 7

The implied standard deviation used in the Black-Scholes option pricing model is:

Accepted Answer

A)   based on historical performance.
B)   a prediction of the volatility of the return on the underlying asset over the life of the option.
C)   a measure of the time decay of an option.
D)   an estimate of the future value of an option given a strike price (
E)  .
E)   a measure of the historical intrinsic value of an option.F) B) and C)
G) A) and E)

Question 8

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)   $0.57
B)   $0.63
C)   $0.91
D)   $1.36
E)   $1.54F) B) and C)
G) B) and D)

Question 9

Assume the price of the underlying stock decreases.How will the values of the options respond to this change?
I.call value decreases
II.call value increases
III.put value decreases
IV.put value increases

Accepted Answer

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

Question 10

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Accepted Answer

A)   equal to one.
B)   between zero and one.
C)   equal to zero.
D)   between zero and minus one.
E)   equal to minus one.F) None of the above
G) A) and B)

Question 11

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?

Accepted Answer

A)   theta
B)   vega
C)   rho
D)   delta
E)   gammaF) All of the above
G) A) and B)

Question 12

-The delta of a call option on a firm's assets is 0.767.This means that a $75,000 project will increase the value of equity by:

Accepted Answer

A)   $38,350.
B)   $45,336.
C)   $57,525.
D)   $64,627.
E)   $65,189.F) D) and E)
G) None of the above

Question 13

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)   $5.39F) A) and E)
G) C) and E)

Question 14

Which of the following variables are included in the Black-Scholes call option pricing formula?
I.put premium
II.N(d1) 
III.exercise price
IV.stock price

Accepted Answer

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

A purely financial merger:

Accepted Answer

A)   increases the risk that the merged firm will default on its debt obligations.
B)   has no effect on the risk level of the firm's debt.
C)   reduces the value of the option to go bankrupt.
D)   has no effect on the equity value of a firm.
E)   reduces the risk level of the firm and increases the value of the firm's equity.F) D) and E)
G) C) and D)

Question 17

Give an example of a protective put and explain how this strategy reduces investor risk.

Accepted Answer

Students should give an example that inc...

Question 18

Which one of the following statements related to options is correct?

Accepted Answer

A)   American stock options can be exercised but not resold.
B)   A European call is either equal to or less valuable than a comparable American call.
C)   European puts can be resold but can never be exercised.
D)   European options can be exercised on any dividend payment date.
E)   American options are valued using the Black-Scholes option pricing model.F) A) and D)
G) A) and E)

Question 19

What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)   $0
B)   $0.93
C)   $1.06
D)   $1.85
E)   $2.14F) B) and D)
G) A) and B)

Question 20

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

Accepted Answer

A)   theta.
B)   vega.
C)   rho.
D)   delta.
E)   gamma.F) None of the above
G) C) and D)

Exam 25: Option Valuation

A purely financial merger:

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Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d1) III.exercise price IV.stock price

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Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Correct AnswerverifiedAn increase in the risk-free rate will i...View AnswerShow Answer

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

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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?

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What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information?

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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?

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The seller of a European call option has the:

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-A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

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Give an example of a protective put and explain how this strategy reduces investor risk.

Correct AnswerverifiedStudents should give an example that inc...View AnswerShow Answer

Which one of the following statements related to options is correct?

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-The delta of a call option on a firm's assets is 0.767.This means that a $75,000 project will increase the value of equity by:

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

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The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

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

Assume the price of the underlying stock decreases.How will the values of the options respond to this change? I.call value decreases II.call value increases III.put value decreases IV.put value increases

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Which one of the following statements related to the implied standard deviation (ISD) is correct?

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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?

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The implied standard deviation used in the Black-Scholes option pricing model is:

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What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

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Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d₁) III.exercise price IV.stock price

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An increase in the risk-free rate will i...
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In the Black-Scholes option pricing formula,N(d₁) is the probability that a standardized,normally distributed random variable is:

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-A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d₁ of a 9-month call option with a strike price of $40?

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Correct Answer
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Students should give an example that inc...
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Because equity can be viewed as a call o...
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