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Exam 16: Option Valuation

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Question 1

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Hedge ratios for long puts are always ________.

A) between −1 and 0
B) between 0 and 1
C) 1
D) greater than 1

E) B) and D)
F) B) and C)

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Question 2

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Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

A) price of the underlying asset
B) risk-free rate of interest
C) time to expiration
D) variance of the underlying asset return

E) A) and C)
F) A) and D)

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Question 3

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The intrinsic value of an out-of-the-money call option ________.

The stock price of Apax Inc. is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth ________ today.

A ________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

A put option has a strike price of $35 and a stock price of $38. If the put option is trading at $1.25, what is the time value embedded in the option?

A higher-dividend payout policy will have a ________ impact on the value of a put and a ________ impact on the value of a call.

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the ________.

A call 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.

The ________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option.

Strike prices of options are adjusted for ________ but not for ________.

Which combination of stock, exercise, and option prices are most likely associated with an American call option?

A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should ________.

The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25?

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

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

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 call option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes OPM, the call option should be worth ________ today.

A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading at $2.25, what is the time value embedded in the option?

In the Black-Scholes model, if an option is not likely to be exercised, both N(d₁) and N(d₂) will be close to ________. If the option is definitely likely to be exercised, N(d₁) and N(d₂) will be close to ________.

The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now should be worth ________ today.