Search
Browse
Create
Log in
Sign up
Log in
Sign up
Upgrade to remove ads
Only $2.99/month
FINA chp 16
STUDY
Flashcards
Learn
Write
Spell
Test
PLAY
Match
Gravity
Key Concepts:
Terms in this set (90)
If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, the std dev would be called the ____
implied volatility
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
intrinsic value
The _____ is the difference between the actual call price and the intrinsic value.
Time value
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
zero ; positive
All else equal, call option values are ____ if the ____ is lower
higher ; exercise price
A ___ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period
binomial model
The Black-Scholes option-pricing formula was developed for ____
European options
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
positive ; positive
The hedge ratio is often called the option's ____
delta
A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ____ and a time value of ____
$5 ; $1.50
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 ____
$0 ; $3.50
Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9 month maturity. All else equal, as the time to expiration approaches, the value of investor A's position will ____ and the value of investor B's position will ______
decrease ; increase
Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will ____ and the value of investor B's position will _____
increase ; decrease
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 _____
increase ; increase
The percentage change in the call option price divided by the percentage change in the stock price is the ____ of the option
elasticity
Before expiration, the time value of an out-of-the-money stock option is ______
positive
The intrinsic value of a call option is equal to _____
the stock price minus the exercise price
The divergence between an option's intrinsic value and its market value is usually greatest when ______
the option is approximately at the money
The value of a call option increases with all of the following except _____
dividend yield
The value of a put option increases with all of the following except _____
stock price
Perfect dynamic hedging requires _______
continuous rebalancing
The delta of an option is _____
the change in the dollar value of an option of a dollar change in the price of the underlying asset
If you know that a call option will be profitably exercised, then the Black-scholes model price will simplify to _____
So - PV(X)
Hedge ratios for long calls are always_______
between 0 and 1
Which of the following is a true statement?
the actual value of a call option is greater than its intrinsic value prior to expiration
A longer time to maturity will unambiguously increase the value of a call option because:
II and III only
Strike prices of options are adjusted for _____ but not for ____
stock splits ; cash dividends
A high dividend payout will ____ the value of a call option and _____ the value of a put option
decrease ; increase
According to the black-scholes option-pricing model, two options of the same stock but with different exercise prices should always have the same ______
implied volatility
When the returns of an option and stock are perfectly correlated as in two-state binomial option model, the hedge ratio must be equal to the ratio of _____
the range of the option outcomes to the range of the stock outcomes
The Black-Scholes hedge ratio for a long call option is equal to ____
N(d1)
The Black-Scholes hedge ratio for a long put-option is equal to ____
N(d1) - 1
In a binomial option model with three subintervals, the probability that the stock price moves up every possible time is _____
12.5%
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 ____
0 ; 1
In the Black-Scholes model, as the stock's price increases, the values of N(d1) and N(d2) will ____ for a call and _____ for a put option.
increase ; decrease
Research suggests that option-pricing models that allow for the possibility of ____ provide more accurate pricing than does the basic Black-Scholes option-pricing model.
I and III only
Research suggests that the performance of the Black-Scholes option-pricing model has _____
been deficient for stocks with high dividend payouts
Research conducted by Rubinstein (1994) suggests that _____ command a disproportionately high time value
out-of-the-money put options
Of the variables in the Black-Scholes OPM, the ___ is not directly observable
Variance of the underlying asset return
The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called _____
portfolio insurance
The delta of a put option on a stock is always ____
between 0 and -1
The price of a stock put option is _____ correlated with the stock price and _____ correlated with the exercise price.
negatively ; positively
The delta of a call option on a stock is always _____
positive but less than 1
Hedge ratios for long call positions are _____ , and hedge ratios for long put positions are _____
positive ; negative
A higher-dividend payout policy will have a _____ impact on the value of a put and a _____ impact on the value of a call
positive ; negative
A one-dollar increase in a stock's price would result in _____ in the call option's value of ____ than one dollar.
an increase ; less
A hedge ratio of .7 implies that a hedge portfolio should consist of
long .7 shares for each short call
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 _____
decrease ; increase
The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6% ... Based on the Black-Scholes OPM, the call option's delta will be ______
.31
The current stock price on Alcoco is $70 and .... According to the Black-Scholes OPM, you should hold _____ shares of stock per 100 put options to hedge your risk
69
The current stock price of National Paper os $69 and the stock does not pay dividends .... 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
$3.26
The current stock price of national paper is $69 and the stock does not pay dividends .... 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
$2.88
The current stock price of Howard & Howard is $64, and the stock does not pay dividends. .... You want 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
$9.62
The current stock price of Howard & Howard is $64 and the stock does not pay dividends. ... You want to purchase a put option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using black-scholes, the put option should be worth ____ today
$.07
The stock price of Apax inc is currently $105. he 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
$11.59
The stock price of Bravo Corp is currently $100. The stock price a year from now will be either $160 of $60 with equal probabilities. The interest rate at which investors invest in rissoles 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
$38.21
If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by ______
purchasing out-of-the-money call options
Which one of the following will increase the value of a put option?
and increase in the volatility of the underlying stock
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 misplacing situation, you may want to _____
buy either the 95 or the 100 call and write the 105 call
You are considering purchasing a call option with a strike price of $35. The price of the underlying stock is currently $27. Without any further information, you would expect the hedge ratio for this option to be _______
positive and near 0
According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by _____
buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price
You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be _____
$3.91
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 .... 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
$.05
The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper corp pays no dividends. ..... A call option on Harper Corp. stock with an exercise price of $30 and the same expiration date should be worth _____ today
$4.31
A call option on Juniper Corp. stock with an exercise price $75 and an expiration date 1 year from now is worth $3 today. ... The stock should be worth _____ today
$69.73
You would like to hold a protective position on the stock of Avalon Corp. to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. ... Suppose the desired put options with X=50 were traded. What would be the hedge ratio for the option?
-.5
You would like to hold a protective put position on the stock of Avalon Corp to lock in a guaranteed minimum value of $50 at year-end. .... Suppose the desired put options with X=50 were traded. How much would it cost to purchase?
$1.19
You would like to hold a protective put position on the stock of Avalon Corp. .... What would have been the cost of a protective put portfolio?
$51.19
You would like to hold a protective put position on the stock of Avalon Corp. .... 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?
1/2 share of stock and $26.19 in bills
You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is _____ or the volatility you input into the model is too ______
overvalued and should be written; low
What combination of variables is likely to lead to the lowest time value?
short time to expiration and low volatility
The time value of a call option is likely to decline most rapidly _____ days before expiration?
10
The fact that American put values may not equal the price implied by put-call parity is attributable to the possibility of what event?
early exercise
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%, std dev = 35%
$2.22
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%, std dev = 22%, dividend yield = 8%
$2.04
The intrinsic value of an out-of-the-money call option ______
is zero
A call option has an exercise price of $30 and stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?
$4
A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading t $2.25, what is the time value embedded in the option?
$.75
What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?
continuous compounding
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 _____
S0 = Xe ^ -rT
A stock priced at $65 has a std dev of 30%. Three-month calls and puts with an exercise price of $60 are available. .... If you want to construct a rissoles arbitrage to exploit the mispriced puts, you should _____
write the call and buy the put and buy the stock and borrow the present value of the exercise price
A stock priced at $65 has a std dev of 30% ... If you construct a rissoles arbitrage to exploit the mispriced puts, your arbitrage profit will be ____
$.42
The option smirk in the black-scholes option model indicates that ______
Stock prices may fall by a larger amount than the model assumes
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?
$1.25
Hedge ratios for long puts are always
between -1 and 0
Which combination of stock, exercise, and option prices are most likely associated with an American call option?
stock = $65, exercise = $60, option = $7
A stock with a stock and exercise price of $20 can either increase to $26 or decrease to $18 over the course of one year. In a one-period binomial option model, given an interest rate of 5% and equal probabilities, what is the likely option price?
$2.88
Given a stock price o $18, an exercise price of $20, and an interest rate of 7%, what are the intrinsic values which will occur for a one-period binomial option model if the stock price goes up to $23 or down to $16?
$3 and $0
In order for a binomial option price to approach the black scholes price, ______
the number of subintervals must increase substantially
The current stock price of KMW is $27, the risk-free rate of return is 4%, and the std dev is 30%. What is the price of a 63-day call option with an exercise price of $25?
$2.65
THIS SET IS OFTEN IN FOLDERS WITH...
INVEST chapter 16
59 terms
Finance 327: Chapter 15
80 terms
Finance 327: Chapter 17
87 terms
Fin 3504 Ch. 17 exam questoins
22 terms
YOU MIGHT ALSO LIKE...
Chapter 16
62 terms
fin 3826 ch. 16
55 terms
Fina Ch16
42 terms
Fi414 Ch16 last pt2
19 terms
OTHER SETS BY THIS CREATOR
Series 7
850 terms
FINA 475 Final
99 terms
IBUS quiz 3 possible questions
38 terms
IBUS Quiz 3
134 terms
OTHER QUIZLET SETS
Fin 307 UNLV Chapter 15 and 16
47 terms
FI 412 Exam 1 Review Questions - CHAPTER 3
21 terms
Econ 235 Exam 2
20 terms
FIN 307 CH 16
24 terms