Question 1

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

Accepted Answer

The price of a put option increases with the volatility of the underlying asset. Among the given options, a $30 stock price with a 25% standard deviation (Option B) represents the highest volatility scenario for an in-the-money put option, leading to the highest put price. Higher volatility increases the probability of the stock price moving below the strike price, thus increasing the value of the put option.

Question 2

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

Accepted Answer

The longer the time to expiration, the higher the option price due to the additional time value. Additionally, the higher the strike price, the higher the put price because there is a greater chance the stock will fall below the higher strike price. Therefore, the combination of a $20 strike price and 60 days to expiration will produce the highest put price.

Question 3

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

Accepted Answer

To maintain an effective hedge, it is important to rebalance the options hedge on a regular basis. Weekly rebalancing allows for adjustments to be made in response to changes in the underlying equity portfolio and market conditions. This helps to ensure that the hedge continues to provide adequate protection against adverse movements in the equity markets.

Question 4

A 6-month call option on ABC stock is priced at $2.80. The call option delta is .66. How will the approximate call option price be computed if the underlying stock price increases by $1?

Accepted Answer

The call option delta of .66 means that for every $1 increase in the underlying stock price, the call option price will increase by approximately $0.66. Therefore, if the underlying stock price increases by $1, the approximate call option price will be $2.80 + ($1 × .66) = $3.46.

Question 5

Stock prices and call option prices are:

Accepted Answer

Stock prices and call option prices are directly related. If the stock price increases, the value of the call option also increases as it gives the holder the right to buy the stock at a lower price. Similarly, if the stock price decreases, the value of the call option decreases as it becomes less attractive to exercise the option at a higher price than the current market price of the stock.

Question 6

Which one of the following statements is correct?

Accepted Answer

Call option deltas measure the change in the option price with respect to a change in the price of the underlying asset, and are always positive for a long call option. Put option deltas, on the other hand, measure the change in the option price with respect to a change in the price of the underlying asset, but are negative for a long put option. Therefore, statement A, B, and D are incorrect, and statement E is too general.

Question 7

The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the ________.

Accepted Answer

The S&P 500 volatility index is commonly known as the VIX, while the NASDAQ 100 volatility index is commonly known as the VXN. Therefore, B is the correct answer as it matches the correct index with its corresponding acronym.

Question 8

Which two of the following are the key reasons why most major corporations issue employee stock options?
I. provide an employee benefit in place of a retirement plan
II. no immediate cost to the corporation
III. align management and shareholder interests
IV. replace employer-provided insurance benefits

Accepted Answer

The key reasons why most major corporations issue employee stock options are to align management and shareholder interests (III) and because there is no immediate cost to the corporation (II). Employee stock options are not issued as a replacement for retirement plans or employer-provided insurance benefits (I and IV).

Question 9

An employee stock option is which one of the following?

Accepted Answer

An employee stock option is a call option, which gives the employee the right to purchase a certain amount of company stock at a predetermined price.

Question 10

Which two of the following characteristics are key to making SPX options an easy choice as a hedge against an equity portfolio?
I. European style
II. American style
III. trade in whole or partial contracts
IV. cash settlement

Accepted Answer

I. European style options can only be exercised on their expiration date. This means that there is no risk of early exercise and unexpected assignment, which makes them easier to manage as a hedge.
III. SPX options trade in whole or partial contracts, which provides flexibility in terms of position size and can help tailor the hedge to the specific needs of the portfolio.
IV. Cash settlement means that the settlement of the option is in cash instead of shares of stock, which can simplify the hedging process and reduce transaction costs.

Question 11

Which one of the following is an argument against repricing employee stock options?

Accepted Answer

Repricing is often criticized as a reward for poor performance because it can allow employees to benefit from a lower strike price without having to improve the company's performance.

Question 12

Which of the following statements related to employee stock options (ESO)are generally correct?
I. ESO vesting encourages long-term employment.
II. Most ESOs are issued at the money.
III. ESOs cannot be resold.
IV. ESOs that are in the money are frequently repriced.

Accepted Answer

I. ESO vesting is designed to encourage long-term employment by providing an incentive to stay with the company until the options vest. II. Most ESOs are indeed issued at the money, meaning the exercise price is set to the stock's current market price. III. ESOs typically cannot be resold or transferred, making them different from publicly traded options. IV is incorrect because repricing ESOs that are in the money (worth more than the exercise price) is not a common practice; repricing usually occurs when options are underwater (worth less than the exercise price) to retain employees.

Question 13

All else constant, which one of the following situations will produce the highest call price given a strike price of $25?

Accepted Answer

As the stock price increases, the call option becomes more valuable, so C and D are more likely to have a higher call price than A and B. In addition, as the option expiration date gets closer, the option becomes more valuable because there is less time for the stock price to move in the opposite direction, so D is more likely to have a higher call price than C. Therefore, choice D is the best choice as it has both a higher stock price and a closer expiration date.

Question 14

Which of the following are typical characteristics of an employee stock option?
I. originally issued with 10-year life
II. right to purchase stock at a designated price
III. exchange-traded
IV. vesting period

Accepted Answer

Employee stock options typically have a designated strike price at which the employee can purchase stock, and have a vesting period during which the employee must remain with the company before being able to exercise the option. Additionally, they are originally issued with a set expiration date, usually 10 years from the grant date. Employee stock options are not exchange-traded, as they are issued specifically to employees of the company rather than being publicly available for trading.

Question 15

All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50?

Accepted Answer

The higher the stock price and standard deviation, the higher the call price. Choice D has both a higher stock price and a higher standard deviation compared to choices A and C, and choice B has the same stock price but lower standard deviation. Therefore, choice D will produce the highest call price.

Question 16

You own shares of AZT stock. Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock?
I. buy call options
II. write call options
III. buy put options
IV. write put options

Accepted Answer

To hedge against a price decrease in AZT stock, you can write call options (II), which allows you to earn premium income that offsets some of the losses from the stock's price decrease. Buying put options (III) gives you the right to sell the stock at a predetermined price, protecting against a drop in the stock's price.

Question 17

Which one of the following inputs for the Black-Scholes model is not directly observable?

Accepted Answer

All of the inputs listed are directly observable except for stock price volatility, which is an estimate and cannot be directly observed.

Question 18

The VIX is a measure of which one of the following?

Accepted Answer

The VIX, or CBOE Volatility Index, is a measure of investor expectations of future market volatility of the S&P 500. It is calculated based on the prices of options on the S&P 500 index, and is often referred to as the "fear index" because it tends to rise during periods of market stress or uncertainty.

Question 19

Repricing an employee stock option involves which one of the following?

Accepted Answer

Repricing an employee stock option involves changing the option strike price, typically to a lower price. This is done in order to provide additional incentive to the employee by making the option more valuable. A stock split or dividend would affect the underlying stock price but not necessarily the option itself. Changes to the expiration date or premium would also not necessarily involve repricing the option.

Question 20

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

Accepted Answer

The value of a put option increases with the time to expiration due to the time value of money. Among the options given, the one with the longest time to expiration (90 days) and the lower stock price ($50, making the option more in the money) will have the highest put price. Therefore, option B is correct.

Quiz 16: Option Valuation

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.

How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge?

A 6-month call option on ABC stock is priced at $2.80. The call option delta is .66. How will the approximate call option price be computed if the underlying stock price increases by $1?

Stock prices and call option prices are:

Which one of the following statements is correct?

The S&P 500 volatility index is the while the NASDAQ 100 volatility index is the .

An employee stock option is which one of the following?

Which two of the following characteristics are key to making SPX options an easy choice as a hedge against an equity portfolio? I. European style II. American style III. trade in whole or partial contracts IV. cash settlement

Which one of the following is an argument against repricing employee stock options?

Which of the following statements related to employee stock options (ESO) are generally correct? I. ESO vesting encourages long-term employment. II. Most ESOs are issued at the money. III. ESOs cannot be resold. IV. ESOs that are in the money are frequently repriced.

All else constant, which one of the following situations will produce the highest call price given a strike price of $25?

Which of the following are typical characteristics of an employee stock option? I. originally issued with 10-year life II. right to purchase stock at a designated price III. exchange-traded IV. vesting period

All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50?

You own shares of AZT stock. Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock? I. buy call options II. write call options III. buy put options IV. write put options

Which one of the following inputs for the Black-Scholes model is not directly observable?

The VIX is a measure of which one of the following?

Repricing an employee stock option involves which one of the following?

Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in the money.