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 the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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 the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-1
Chapter 21 - Option Valuation
3. Before expiration, the time value of an at-the-money call option is usually
A. positive.
B. equal to zero.
C. negative.
D. equal to the stock price minus the exercise price.
E. None of the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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 the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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 the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-2
Chapter 21 - Option Valuation
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 the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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.
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Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-3
Chapter 21 - Option Valuation
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 or out of the money.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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 or out of the money.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-4
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
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
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-5
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
16. Other things equal, the price of a stock call option is positively correlated with which of
the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The stock price, time to expiration, and stock volatility
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
17. Other things equal, the price of a stock call option is negatively correlated with which of
the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The stock price, time to expiration, and stock volatility
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Topic: 21-04 Restrictions on Option Values
21-6
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
19. Other things equal, the price of a stock put option is positively correlated with which of
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, stock volatility, and exercise price
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
20. Other things equal, the price of a stock put option is negatively correlated with which of
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, stock volatility, and exercise price
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-7
Chapter 21 - Option Valuation
21. The price of a stock put option is __________ correlated with the stock price and
__________ correlated with the strike price.
A. positively; positively
B. negatively; positively
C. negatively; negatively
D. positively; negatively
E. not; not
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
22. The price of a stock call option is __________ correlated with the stock price and
__________ correlated with the strike price.
A. positively; positively
B. negatively; positively
C. negatively; negatively
D. positively; negatively
E. not; not
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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.
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Topic: 21-04 Restrictions on Option Values
21-8
Chapter 21 - Option Valuation
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, risk-free rate of interest, and time to expiration
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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 1% change in the value of the
underlying asset.
D. the change in the volatility of the underlying stock price.
E. None of the options are correct.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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 the options are correct.
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
21-9
Chapter 21 - Option Valuation
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 the options are correct.
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
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
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
29. A hedge ratio for a call is always
A. equal to one.
B. greater than one.
C. between zero and one.
D. between negative one and zero.
E. of no restricted value.
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
21-10
Chapter 21 - Option Valuation
30. A hedge ratio for a put is always
A. equal to one.
B. greater than one.
C. between zero and one.
D. between negative one and zero.
E. of no restricted value.
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-11
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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 the options are correct.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
35. The elasticity of a stock put option is always
A. positive.
B. smaller than one.
C. negative.
D. infinite.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-12
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
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.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-13
Chapter 21 - Option Valuation
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.
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
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. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-14
Chapter 21 - Option Valuation
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. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
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. Portfolio A if the stock price increases and portfolio B if it decreases
E. Portfolio B if the stock price increases and portfolio A if it decreases
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-15
Chapter 21 - Option Valuation
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. Portfolio A if the stock price increases, and portfolio B if it decreases
E. Portfolio B if the stock price increases, and portfolio A if it decreases
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
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 $1 decline in the stock price?
A. +$700
B. +$500
C. -$1,150
D. -$520
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-16
Chapter 21 - Option Valuation
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 $1 decline in the stock price?
A. +$700
B. -$850
C. -$580
D. -$520
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
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 $1 decline in the stock price?
A. -$345
B. +$500
C. -$580
D. -$520
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
47. A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio
for the call is 0.6, what would be the dollar change in the value of the portfolio in response to
a $1 decline in the stock price?
A. +$700
B. +$500
C. -$580
D. -$520
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-17
Chapter 21 - Option Valuation
48. If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration
date and exercise price as the call would be
A. 0.70.
B. 0.30.
C. -0.70.
D. -0.30.
E. -0.17.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
49. If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration
date and exercise price as the call would be
A. 0.30.
B. 0.50.
C. -0.60.
D. -0.50.
E. -0.17.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
50. 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
A. 0.60.
B. 0.40.
C. -0.60.
D. -0.40.
E. -0.17.
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Topic: 21-05 Restrictions on the Value of a Call Option
21-18
Chapter 21 - Option Valuation
51. 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
A. 0.70.
B. 0.30.
C. -0.70.
D. -0.30.
E. -0.17.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
52. A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for
the put is -0.30, and the stock is currently selling for $46, what is the elasticity of the put?
A. 2.76
B. 2.30
C. -7.67
D. -2.76
E. -2.30
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
53. A put option on the S&P 500 Index will best protect a portfolio
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. that replicates the Dow.
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Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-19
Chapter 21 - Option Valuation
54. Higher dividend-payout policies have a __________ impact on the value of the call and a
__________ impact on the value of the put compared to lower dividend-payout policies.
A. negative; negative
B. positive; positive
C. positive; negative
D. negative; positive
E. zero; zero
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
55. Lower dividend-payout policies have a __________ impact on the value of the call and a
__________ impact on the value of the put compared to higher dividend-payout policies.
A. negative; negative
B. positive; positive
C. positive; negative
D. negative; positive
E. zero; zero
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-01 Option Valuation: Introduction
56. A $1 decrease in a call option's exercise price would result in a(n) __________ in the call
option's value of __________ one dollar.
A. increase; more than
B. decrease; more than
C. decrease; less than
D. increase; less than
E. increase; exactly
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-20
Chapter 21 - Option Valuation
57. Which one of the following variables influences the value of call options?
I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility
A. I and IV only
B. II and III only
C. I, II, and IV only
D. I, II, III, and IV
E. I, II, and III only
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
58. 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
A. I and IV only
B. II and III only
C. I, II, and IV only
D. I, II, III, and IV
E. I, II, and III only
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Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-21
Chapter 21 - Option Valuation
59. An American call-option buyer on a nondividend-paying stock will
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 the options are correct.
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Learning Objective: 21-02 Restrictions on Option Values.
Topic: 21-02 Intrinsic and Time Values
60. Relative to European puts, otherwise identical American put options
A. are less valuable.
B. are more valuable.
C. are equal in value.
D. will always be exercised earlier.
E. None of the options are correct.
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Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
61. Use the two-state put-option value in this problem. SO = $100; X = $120; the two
possibilities for ST are $150 and $80. The range of P across the two states is _____, and the
hedge ratio is _______.
A. $0 and $40; -4/7
B. $0 and $50; +4/7
C. $0 and $40; +4/7
D. $0 and $50; -4/7
E. $20 and $40; +1/2
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Learning Objective: 21-03 Binomial Option Pricing.
Topic: 21-03 Determinants of Option Values
21-22
Chapter 21 - Option Valuation
62. Empirical tests of the Black-Scholes option pricing model
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 outof-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. show that the model generates values fairly close to the prices at which options trade and
indicate that the mispricing that does occur is due to the possible early exercise of American
options on dividend-paying stocks.
E. All of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 21-06 Empirical Evidence on Option Pricing.
Topic: 21-06 Early Exercise and Dividends
63. Options sellers who are delta-hedging would most likely
A. sell when markets are falling.
B. buy when markets are rising.
C. sell when markets are falling and buy when markets are rising.
D. sell whether markets are falling or rising.
E. buy whether markets are falling or rising.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-23
Chapter 21 - Option Valuation
64. An American-style call option with six months to maturity has a strike price of $35. The
underlying stock now sells for $43. The call premium is $12.
What is the intrinsic value of the call?
A. $12
B. $8
C. $0
D. $23
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
65. An American-style call option with six months to maturity has a strike price of $35. The
underlying stock now sells for $43. The call premium is $12.
What is the time value of the call?
A. $8
B. $12
C. $0
D. $4
E. Cannot be determined without more information
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-24
Chapter 21 - Option Valuation
66. An American-style call option with six months to maturity has a strike price of $35. The
underlying stock now sells for $43. The call premium is $12.
If the option has delta of.5, what is its elasticity?
A. 4.17
B. 2.32
C. 1.79
D. 0.5
E. 1.5
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
67. An American-style call option with six months to maturity has a strike price of $35. The
underlying stock now sells for $43. The call premium is $12.
If the company unexpectedly announces it will pay its first-ever dividend three months from
today, you would expect that
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. the put price would not change.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-25
Chapter 21 - Option Valuation
68. The intrinsic value of an out-of-the-money call option is equal to
A. the call premium.
B. zero.
C. the stock price minus the exercise price.
D. the striking price.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
69. Since deltas change as stock values change, portfolio hedge ratios must be constantly
updated in active markets. This process is referred to as
A. portfolio insurance.
B. rebalancing.
C. option elasticity.
D. gamma hedging.
E. dynamic hedging.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
70. In volatile markets, dynamic hedging may be difficult to implement because
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 the options are correct.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-26
Chapter 21 - Option Valuation
71. Rubinstein (1994) observed that the performance of the Black-Scholes model had
deteriorated in recent years, and he attributed this to
A. investor fears of another market crash.
B. higher-than-normal dividend payouts.
C. early exercise of American call options.
D. decreases in transaction costs.
E. None of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-06 Empirical Evidence on Option Pricing.
Topic: 21-06 Early Exercise and Dividends
72. The time value of a call option is
I) the difference between the option's price and the value it would have if it were expiring
immediately.
II) the same as the present value of the option's expected future cash flows.
III) the difference between the option's price and its expected future value.
IV) different from the usual time value of money concept.
A. I
B. I and II
C. II and III
D. II
E. I and IV
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-27
Chapter 21 - Option Valuation
73. The time value of a put option is
I) the difference between the option's price and the value it would have if it were expiring
immediately.
II) the same as the present value of the option's expected future cash flows.
III) the difference between the option's price and its expected future value.
IV) different from the usual time value of money concept.
A. I
B. I and II
C. II and III
D. II
E. I and IV
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
74. The intrinsic value of an at-the-money call option is equal to
A. the call premium.
B. zero.
C. the stock price plus the exercise price.
D. the striking price.
E. None of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-28
Chapter 21 - Option Valuation
75. As the underlying stock's price increased, the call option valuation function's slope
approaches
A. zero.
B. one.
C. two times the value of the stock.
D. one-half the value of the stock.
E. infinity.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-02 Restrictions on Option Values.
Topic: 21-02 Intrinsic and Time Values
76. The intrinsic value of an in-of-the-money call option is equal to
A. the call premium.
B. zero.
C. the stock price minus the exercise price.
D. the striking price.
E. None of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-29
Chapter 21 - Option Valuation
77. 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.
A. I and II
B. I and III
C. II and II
D. I, II, and IV
E. I, II, III, and IV
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
78. The intrinsic value of an in-the-money put option is equal to
A. the stock price minus the exercise price.
B. the put premium.
C. zero.
D. the exercise price minus the stock price.
E. None of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-30
Chapter 21 - Option Valuation
79. The hedge ratio of an option is also called the option's
A. alpha.
B. beta.
C. sigma.
D. delta.
E. rho.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
80. The intrinsic value of an at-the-money put option is equal to
A. the stock price minus the exercise price.
B. the put premium.
C. zero.
D. the exercise price minus the stock price.
E. None of the options are correct.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
81. 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 intrinsic value of the call?
A. $12
B. $10
C. $8
D. $23
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
21-31
Chapter 21 - Option Valuation
82. 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?
A. $8
B. $12
C. $6
D. $4
E. Cannot be determined without more information
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
83. 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
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. the put price would not change.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 21-04 Black-Scholes Option Valuation.
Topic: 21-04 Restrictions on Option Values
21-32
Chapter 21 - Option Valuation
84. The intrinsic value of an out-of-the-money put option is equal to
A. the stock price minus the exercise price.
B. the put premium.
C. zero.
D. the exercise price minus the stock price.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-01 Option Valuation: Introduction.
Topic: 21-01 Option Valuation: Introduction
85. Vega 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 1% change in the value of the
underlying asset.
D. the change in the volatility of the underlying stock price.
E. the sensitivity of an option's price to changes in volatility.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 21-05 Using the Black-Scholes Formula.
Topic: 21-05 Restrictions on the Value of a Call Option
21-33