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Exam 16: Option Valuation

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Question 21

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The fact that American put values may not equal the price implied by put call parity is attributable to the possibility of what event?

A) Changes in the dividend
B) Early exercise
C) Interest rate declines
D) Interest rate rises

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Question 22

Multiple Choice

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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 ______.

A) 1; 0
B) 0; 1
C) -1; 1
D) 1: -1

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Question 23

Multiple Choice

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A call option has an exercise price of $30 and a stock price of $34.If the call option is trading for $5.25,what is the intrinsic value of the option?

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.

Before expiration the time value of an out-of-the money stock option is __________.

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 call option should be worth __________ today.

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________.

All else equal call option values are _____ if the _____ is lower.

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.

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.early exercise II.changing expected returns of the stock III.time varying stock price volatility

Perfect dynamic hedging requires _______________.

According to the put-call parity theorem,the payoffs associated with ownership of a call option can be replicated by __________________.

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. -Hedge ratios for long puts 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. -The stock price of Ajax 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 one year from now should be worth __________ today.

The delta of a call option on a stock is always __________.

Research suggests that the performance of the Black-Scholes option pricing model has __________________.

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

Which one of the following will increase the value of a put option?

A longer time to maturity will unambiguously increase the value of a call option because __________. I.the longer maturity time reduces the effect of a dividend on call price II.with a longer time to maturity the present value of the exercise price falls III.with a longer time to maturity the range of possible stock prices at expiration increases

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%.You wish to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now.Based on the Black-Scholes OPM,the call option's delta will be __________.