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FINC 445 FINAL
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Terms in this set (29)
Which of the following describes delta?
The ratio of a change in the option price to the corresponding change in the stock price.
Which of the following is NOT true in a risk-neutral world?
Investors expect higher returns to compensate for higher risk.
The expected return on a stock is the risk-free rate.
The expected return on a call option is independent of its strike price.
The discount rate used for the expected payoff on an option is the risk-free rate
Investors expect higher returns to compensate for higher risk.
Which of the following is NOT true?
A hedge set up to value an option does not need to be changed.
Risk-neutral valuation involves assuming that the expected return is the risk-free rate and then discounting expected payoffs at the risk-free rate.
Risk-neutral valuation and no-arbitrage give the same option prices.
4
A hedge set up to value an option does not need to be changed.
Which of the following is true for a call option on a stock worth $50:
As a stock's expected return increases the price of the option stays the same.
A stock is expected to return 10% when the risk-free rate is 4%. What is the correct discount rate to use for the expected payoff on an option in the real world?
It could be more or less than 10%
In a binomial tree created to value an option on a stock, the expected return on the option is:
The risk-free rate
In a binomial tree created to value an option on a stock, the expected return on the stock is:
The risk-free rate
Which of the following describes how American options can be valued using a binomial tree?
Check whether early exercise is optimal at all nodes where the option is in-the-money.
When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock, which of the following is true?
The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased.
Which of the following is a way of extending the Black-Scholes-Merton formula to value a European call option on a stock paying a single dividend?
Subtract the present value of the dividend from the stock price.
What was the original Black-Scholes-Merton model designed to value?
A European option on a stock providing no dividends.
Which of the following is measured by the VIX index:
Implied volatilities for stock options trading on the S&P 500 Index.
When there are two dividends on a stock, Black's approximation sets the value of an American call option equal to which of the following (see eText for methodology if needed):
The greater of the value in B and the value assuming no early exercise.
The risk-free rate is 5% and the expected return on a non-dividend paying stock is 12%. Which of the following is a way of valuing a derivative?
Assume that the expected growth rate for the stock price is 5% and discount the expected payoff at 5%.
Which of the following is true when there are dividends:
(I) It is never optimal to exercise a call option on the stock early.
(II) It can be optimal to exercise a call option at any time.
(III) It is only ever optimal to exercise a call option immediately after an ex-dividend date.
None of the above
What does N(x) denote?
The area under a normal distribution up to x.
Which of the following is a definition of volatility?
The standard deviation of the return, measured with continuous compounding, in one year.
Which of the following is assumed by the Black-Scholes-Merton model?
The stock price at a future time is lognormal.
When the interest rate is zero, which of the following is true for a delta-neutral portfolio with a positive gamma?
As gamma increases theta becomes more negative.
Which of the following is true for a call option on a non-dividend-paying stock to have a delta of 0.5?
The option must be out-of-the-money.
Vega tends to be high for which of the following:
At-the-money options
Gamma tends to be high for which of the following:
At-the-money options
Which of the following is NOT true about gamma?
The magnitude of gamma is a measure of the curvature of the portfolio value as a function of the underlying asset price.
A long position in either a call or a put has a positive gamma.
A highly positive or highly negative value of gamma indicates that a portfolio needs frequent rebalancing to stay delta neutral.
A big positive value for gamma indicates that a big movement in the asset price in either direction will lead to a loss.
A big positive value for gamma indicates that a big movement in the asset price in either direction will lead to a loss.
Which of the following could NOT be a delta-neutral portfolio?
A long position in call options plus a short position in the underlying stock
A long position in put options plus a long position in the underlying stock
A long position in a put option plus a long position in the call option
A short position in call options plus a short position in the underlying stock
A short position in call options plus a short position in the underlying stock
Maintaining a delta-neutral portfolio is an example of which of the following:
Dynamic hedging
Which of the following is true?
The gamma of a European put equals the gamma of a European call.
What does rho measure?
The sensitivity of a portfolio value to interest rate changes.
What does gamma measure?
The rate of the change of delta with the asset price.
What does theta measure?
The rate of the change of the portfolio value with the passage of time.
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