Deck 24: a Black Scholes Option Pricing Model

Question 1

The Black and Scholes option pricing model makes an assumption that the stock pays dividends during the time the option is outstanding.

Answer 1

False

Question 2

For call options,the positive relationship between price and time is

A)Because the longer the time period the more volatility in the stock price
B)Caused by an increasing intrinsic value due to lower present values of the exercise price for longer time periods
C)Related to the opportunity to have more time to take advantage of the fluctuations in the price of the stock
D)Related to the fact that you can use the riskless rate of interest to leverage your gains

Answer 2

B

Question 3

In the Black and Scholes Option Pricing Model the put and call prices are a function of which of the following:

A)The underlying stock's market price and the strike price
B)The length of the option's life and the riskless rate of interest
C)The volatility of the stock price changes expressed as the statistical measure "variance"
D)All of the above

Answer 3

D

Question 4

The Black and Scholes option pricing model makes an assumption that stock prices are lognormally distributed with a constant variance for the underlying returns.

Question 5

The Black and Scholes option pricing model makes an assumption that markets have taxes and transactions costs.

Question 6

The Black and Scholes option pricing model makes an assumption that the stock pays no dividends or makes no other distributions.

Question 7

The Black and Scholes option pricing model makes an assumption that the option could only be exercised at maturity.

Question 8

One of the foundations of the Black Scholes Option Pricing Model was that the shares of stock and call option combined to form

A)A riskless hedge that,by definition,had to duplicate the return of a discount bond with the same maturity length as the option
B)A hedge that by definition had the same risk as a 1 year U.S.Treasury bill
C)A hedge that by definition had to equal the risk of the underlying common stock on which the option was priced
D)None of the above are true

Question 9

The Black and Scholes option pricing model makes an assumption that the option could be exercised before maturity.

Question 10

The Black and Scholes option pricing model makes an assumption that stock prices are normally distributed with a constant mean returns over the period of the option.

Question 11

What does the Black and Scholes Option Pricing model mean by "markets are frictionless"?

A)There are no taxes
B)There are no transactions costs
C)All securities are infinitely divisible
D)All market participants may borrow or lend at the known constant riskless rate of interest
E)All of the above are correct

Question 12

For call options the price is positively related to

A)The stock's price changes and the volatility of the stock price changes
B)To the time to maturity and the riskless rate of interest
C)The strike price
D)A)and B)

Question 13

For put options,the price is always positively related to

A)The stock's price changes
B)The time to maturity
C)The strike price and the volatility of the stock price changes
D)Riskless rate of interest

Question 14

The Black and Scholes option pricing model makes an assumption that markets are frictionless.

Question 15

The Black and Scholes option pricing model makes an assumption that markets have normal friction.

Question 16

The Black and Scholes option pricing model makes an assumption that markets have no taxes or transactions costs.

Question 17

Which of the following is NOT an assumption of the Black and Scholes Option Pricing Model?

A)Markets are frictionless and have no taxes or transaction cost
B)The stock pays dividends during its option period
C)Stock prices have a distribution that is skewed to the right
D)The option may be exercised before maturity