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Exam 16: Option Valuation

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Question 1

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

A) N(d1)
B) N(d2)
C) N(d1) - 1
D) N(d2) - 1

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

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Question 2

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Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration.If prices are at equilibrium the value of this portfolio is ________.

A) S₀ - Xe^-rt
B) S₀ - X
C) S₀ + Xe^-rt
D) S₀ + X

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

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Question 3

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Calculate the price of a European call option using the Black Scholes model and the following data.Stock price = $56.80.Exercise price = $55.Time to expiration = 15 days.Risk free rate = 2.5%.Standard deviation = 22%.Dividend yield = 8%.

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 wished to construct a riskless arbitrage to exploit the mispriced puts you should ____________.

The Black-Scholes option pricing formula was developed for __________.

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 construct a riskless arbitrage to exploit the mispriced puts your arbitrage profit will be

A 45 put option on a stock priced at $50 is priced at $3.50.This call has an intrinsic value of ______ and a time value of _____.

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 _________ is the difference between the actual call price and the intrinsic value.

Calculate the price of a call option using the Black Scholes model and the following data.Stock price = $47.30.Exercise price = $50.Time to expiration = 85 days.Risk free rate = 3.0%.Standard deviation = 35%.

A high dividend payout will ______ the value of a call option and ______ the value of a put option.

The value of a put option increases with all of the following except ___________.

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. -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 at is 6%.Using the binomial OPM,the value of a put option with an exercise price of $135 and an expiration date one year from now should be worth __________ today.

The intrinsic value of a call option is equal to _______________.

Which of the following is a true statement?

If a stock price increases,the price of a put option on the stock will __________ and the price of a call option on the stock will __________.

The hedge ratio is often called the option's _______.

The current stock price of International Paper is $69 and the stock does not pay dividends. The instantaneous risk free rate of return is 10%. The instantaneous standard deviation of International Paper's stock is 25%. You wish 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 put option should be worth __________ today.

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

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.