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Exam 16: Option Valuation

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Question 41

Multiple Choice

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You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. What would have been the cost of a protective put portfolio?

A) $48.81
B) $51.19
C) $52.38
D) $53.38

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

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Question 42

Multiple Choice

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The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called ________.

A) trading on gamma
B) index optioning
C) portfolio insurance
D) index arbitrage

E) A) and B)
F) All of the above

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Question 43

Multiple Choice

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The current stock price of National Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National Paper's stock is 25%. You want to purchase a put option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes, the put option should be worth ________ today.

Which one of the following will increase the value of a put option?

Which of the following is a true statement?

Research conducted by Rubinstein (1994) suggests that ________ command a disproportionately high time value.

If you know that a call option will be profitably exercised, then the Black-Scholes model price will simplify to ________.

When the returns of an option and stock are perfectly correlated as in a two-state binomial option model, the hedge ratio must be equal to the ratio of ________.

A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ________ and a time value of ________.

A one-dollar increase in a stock's price would result in ________ in the call option's value of ________ than one dollar.

In a binomial option model with three subintervals, the probability that the stock price moves up every possible time is ________.

According to the Black-Scholes option-pricing model, two options on the same stock but with different exercise prices should always have the same ________.

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ________ intrinsic value and ________ time value.

What combination of variables is likely to lead to the lowest time value?

The Black-Scholes hedge ratio for a long call option is equal to ________.

The stock price of Bravo Corp. is currently $100. The stock price a year from now will be either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135 and an expiration date 1 year from now should be worth ________ today.

Investor A bought a call option, and investor B bought a put option. All else equal, if the underlying stock price volatility increases, the value of investor A's position will ________ and the value of investor B's position will ________.

The divergence between an option's intrinsic value and its market value is usually greatest when ________.

All else equal, call option values are ________ if the ________ is lower.

A call option on Juniper Corp. stock with an exercise price of $75 and an expiration date 1 year from now is worth $3 today. A put option on Juniper Corp. stock with an exercise price of $75 and an expiration date 1 year from now is worth $2.50 today. The risk-free rate of return is 8%, and Juniper Corp. pays no dividends. The stock should be worth ________ today.