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Exam 16: Option Valuation

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Question 41

Multiple Choice

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The time value of a call option is likely to decline most rapidly ________ days before expiration?

A) 10
B) 30
C) 60
D) 90

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

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Question 42

Multiple Choice

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If you have an extremely "bullish" outlook on the stock market,you could attempt to maximize your rate of return by ________________.

A) purchasing out-of-the-money call options
B) purchasing at-the-money bull spreads
C) purchasing in-the-money call options
D) purchasing at-the-money call options

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

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Question 43

Multiple Choice

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Hedge ratios for long call position are __________ and hedge ratios for long put positions are ____________.

Hedge ratios for long calls are always __________.

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. -Using the Black-Scholes OPM,the call option should be worth __________ today.

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

The percentage change in the stock call option price divided by the percentage change in the stock price is the __________ of the option.

What portfolio position in stock and T-Bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50?

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

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

You find the option prices for three June call options on the same stock.The 95 call has an implied volatility of 25%,the 100 call has an implied volatility of 25% and the 105 call has an implied volatility of 30%.If you believe this represents a mis-pricing situation you may wish to ____________________________.

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

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. -The option smirk in the Black-Scholes option model indicates that __________.

A 45 call option on a stock priced at $50 is priced at $6.50.This call has an intrinsic value of ______ and a time value of _____.

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?

The current stock price of Alcoa is $70 and the stock does not pay dividends.The instantaneous risk free rate of return is 6%.The instantaneous standard deviation of Alcoa's stock is 40%.A put option on this stock with an exercise price of $75 and an expiration date 30 days from now.According to the Black-Scholes OPM,you should hold __________ shares of stock per 100 put options to hedge your risk.

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

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

The delta of an option 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 _________________.