Deck 25: Option Valuation

Question 1

The expiration date is the only date the owner of a European option can exercise the option.

Answer 1

True

Question 2

An increase in the underlying stock price will increase the value of a call option.

Answer 2

True

Question 3

Selling a call option may give you the obligation to sell shares.

Answer 3

True

Question 4

Selling a put option may give you the obligation to buy shares.

Question 5

The seller of a put agrees to purchase shares of stock if the option is exercised.

Question 6

A protective put entails the purchase of a put option on a stock to limit the downside risk associated
with owning that stock.

Question 7

An increase in the exercise price will increase the value of a call option.

Question 8

The strike price is the price the owner of a call pays per share to purchase shares of stock.

Question 9

An increase in the time to expiration will increase the value of a call option.

Question 10

When the market interest rates increase, it would unambiguously decrease the value of an
American put option.

Question 11

The relationship between the prices of the underlying stock, a call option, a put option, and a
riskless asset is referred to as a protective put.

Question 12

Buying a call option gives you the right to purchase shares.

Question 13

Buying a put option gives you the right to sell shares.

Question 14

The value of a call increases when the volatility of the price of the underlying stock increases.

Question 15

The primary purpose of a protective put is to limit the downside risk of asset ownership:

Question 16

When the exercise price is increased, it would unambiguously decrease the value of an American
put option.

Question 17

A put option is a wasting asset; i.e., its value declines with the passage of time, all else equal.

Question 18

The value of a put decreases as the exercise price increases.

Question 19

When the variance of the underlying asset increases, it would unambiguously decrease the value of
an American put option.

Question 20

The risk-free rate of return is a variable that determines the value of an option.

Question 21

When the value of the underlying asset increases, it would unambiguously decrease the value of an
American put option.

Question 22

Exercise price Is a variables that is included in the Black-Scholes call option pricing formula.

Question 23

The formula C0 >= 0 if (S0 - E) correctly describes the boundary values for an American call option.

Question 24

The intrinsic value of a call is always equal to zero if the call is currently out of the money.

Question 25

An increase in the variance of the return on the underlying asset will increase the value of a call
option.

Question 26

The underlying stock price is a variable that determines the value of an option.

Question 27

According to the Black-Scholes model, when the expiration date is extended, it results in a
decrease in the value of a call option.

Question 28

The sensitivity of an option's value to a change in the option's time to expiration is measured by the
option theta.

Question 29

The sensitivity of an option's value to a change in the risk-free rate is measured by the option rho.

Question 30

Stock price Is a variables that is included in the Black-Scholes call option pricing formula.

Question 31

Stock beta is a variables that is included in the Black-Scholes call option pricing formula.

Question 32

Gamma is the sensitivity of an option's value to a change in the risk-free rate.

Question 33

Delta is the effect on an option's value of a small change in the value of the underlying asset is
called the option.

Question 34

The time to expiration is a variable that determines the value of an option.

Question 35

The formula C0 >= (S0 + E) if (S0 + E) >= 0 correctly describe the boundary values for an American
call option.

Question 36

Standard deviation of the return on a stock Is a variables that is included in the Black-Scholes call
option pricing formula.

Question 37

The effect on an option's value of a small change in the value of the underlying asset is called the
option theta.

Question 38

According to the Black-Scholes model, when the exercise price is increased, it results in a decrease
in the value of a call option.

Question 39

Put-call parity the relationship between the prices of the underlying stock, a call option, a put
option, and a riskless asset is referred to as:

Question 40

The formula C0 = S0 correctly describes the boundary values for an American call option.

Question 41

A decrease in the Time to expiration will increase the value of a put option.

Question 42

Given an underlying stock price of $45.80, the October 45 put is in the money.

Question 43

An American call option, with an exercise price of $5, sells for $2; the stock price is $8 presents an
arbitrage opportunity. (Assume no transaction costs and any option can be exercised immediately).

Question 44

According to the Black-Scholes model, when the variance of the underlying asset decreases, it
results in a decrease in the value of a call option.

Question 45

C1 = (S1 - E) if (S1 - E) > 0 identifies the value of a call option at expiration.

Question 46

According to the Black-Scholes model, when the risk-free rate increases, it results in a decrease in
the value of a call option.

Question 47

When the exercise price is increased, it would unambiguously increase the value of an American
put option.

Question 48

When the market interest rates increase, it would unambiguously increase the value of an American
put option.

Question 49

An American put option, with an exercise price of $15, sells for $7.50; the stock price is $6 presents
an arbitrage opportunity. (Assume no transaction costs and any option can be exercised
immediately).

Question 50

A decrease in the Exercise price will increase the value of a put option.

Question 51

Given an underlying stock price of $45.80, the November 50 call is in the money.

Question 52

A decrease in the current value of the underlying security will increase the value of a put option.

Question 53

When the following value of the underlying asset increases, it would unambiguously increase the
value of an American put option.

Question 54

Given an underlying stock price of $45.80, the October 45 call is in the money.

Question 55

A decrease in the Variance of return of the underlying asset will increase the value of a put option.

Question 56

C1 = (S1 - E) if (S1 - E) 0 identifies the value of a call option at expiration.

Question 57

C1 = 0 if (S1 - E) >0 identifies the value of a call option at expiration.

Question 58

Given an underlying stock price of $45.80, the November 47 1/2 put is in the money.

Question 59

C1 = 0 if (S1 - E) 0 identifies the value of a call option at expiration.

Question 60

Given that the underlying stock price is $25, the March 22 1/2 put is in the money.

Question 61

The Black-Scholes Option Pricing Model as it pertains to calls is based on the stock price, strike
price, time to maturity, standard deviation of the stock, and the price of the

Question 62

Given that the underlying stock price is $25, then the January 20 call is in the money.

Question 63

A decrease in the standard deviation of the return on the stock will increase the value of a call
option.

Question 64

Given that the underlying stock price is $25, then the February 20 put is in the money.

Question 65

The intrinsic value of a call is the value of the call if it were about to expire.

Question 66

The value of a put increases as the price of the underlying stock increases.

Question 67

An increase in the time to expiration will increase the value of a call option.

Question 68

An increase in the T-bill rate will increase the value of a call option.

Question 69

The value of a call decreases as the exercise price increases.

Question 70

The intrinsic value of a call is equal to the lower bound of a call's value.

Question 71

The value of a call increases when the risk-free rate of return increases.

Question 72

The value of a call increases as the price of the underlying stock increases.

Question 73

A decrease in the strike price will increase the value of a call option.

Question 74

The value of a call increases when the stock price increases.

Question 75

The strike price is a variable that determines the value of an option.

Question 76

The intrinsic value of a call is another name for the market price of a call.

Question 77

Given that the underlying stock price is $25, then the February 20 call is in the money.

Question 78

The value of a call increases when the time to expiration increases.

Question 79

The Black-Scholes Option Pricing Model as it pertains to calls is based on European options.

Question 80

The sensitivity of an option's value to a change in the standard deviation of the return on the
underlying asset is measured by the option vega