Deck 17: Principles of Options and Option Pricing

Question 1

A famous option-pricing model was developed by

A) Fisher and Lorie
B) Black and Scholes
C) Ingersoll and Rand
D) Sharpe and Lintner

Answer 1

Black and Scholes

Question 2

A primary use of options in portfolio management is

A) risk management
B) meeting statutory requirements
C) satisfying legal lists
D) estate taxes

Answer 2

risk management

Question 3

The most common use of options by individuals is

A) tax avoidance
B) income generation
C) arbitrage
D) diversification

Answer 3

income generation

Question 4

Which of the following gives its owner the right to buy?

A) Straddle
B) Put option
C) Call option
D) Spread

Question 5

The price of an option is called its

A) time value
B) intrinsic value
C) premium
D) expiration value

Question 6

For most options, an individual investor views expiration day as the _____ of the month.

A) first business day
B) second Tuesday
C) second Tuesday after the first Monday
D) third Friday

Question 7

Writing an option is

A) selling an option as an opening transaction
B) selling an option as a closing transaction
C) buying an option as an opening transaction
D) buying an option as a closing transaction

Question 8

Who keeps the option premium no matter what?

A) The Options Clearing Corporation
B) The option writer
C) The option buyer
D) The option writer and the option buyer split it

Question 9

A stock priced at $55 per share will most likely have option striking prices _____ apart.

A) $1
B) $2
C) $4
D) $5

Question 10

The Options Clearing Corporation is most concerned with

A) market risk
B) credit risk
C) interest rate risk
D) political risk

Question 11

On which of the following exchanges are the fewest options traded?

A) New York Stock Exchange
B) Philadelphia Stock Exchange
C) Chicago Board Options Exchange
D) American Stock Exchange

Question 12

The book used an example of call options and

A) libraries
B) hockey tickets
C) automobile transmissions
D) telephones

Question 13

Which of the following is correct?

A) Intrinsic value - time value = option premium
B) Intrinsic value + time value = option premium
C) Intrinsic value = time value - option premium
D) Intrinsic value = time value + option premium

Question 14

An option which can be exercised anytime is a(n)

A) European option
B) wildcard option
C) Asian option
D) American option

Question 15

An option contract usually covers ____ shares.

A) 10
B) 50
C) 100
D) 1000

Question 16

Option exercise is at the prerogative of the

A) option writer
B) option buyer
C) either the option writer or the option buyer
D) Options Clearing Corporation

Question 17

An increase in which of the following will cause a call option to decline in value?

A) Volatility
B) Underlying asset price
C) Striking price
D) Interest rates

Question 18

A person holds 2 XYZ APR 60 calls. What is their holding after a 2 for 1 stock split?

A) 2 XYZ APR 60 calls
B) 4 XYZ APR 30 calls
C) 2 XYZ APR 30 calls
D) 4 XYZ APR 60 calls

Question 19

All of the following are assumptions of the Black-Scholes option pricing model except

A) markets are efficient
B) no dividends
C) interest rates are constant
D) investors are generally bullish

Question 20

Delta is the

A) theoretical value of an option
B) expected change in the option value as the underlying asset price changes
C) intrinsic value of the option
D) influence of dividends on the option value

Question 21

For at-the-money stock options, put/call parity requires that, for otherwise similar options

A) puts sell for more than calls
B) puts sell for the same price as calls
C) puts sell for less than calls
D) puts sell for at least as much as calls

Question 22

The delta of a call option can be calculated as part of the Black-Scholes model since it is equal to

A) N(d₁)
B) N(d₂)
C) Ke^-rt
D) d₂

Question 23

According to option pricing theory, a higher dividend payout would cause the call option premium to

A) increase
B) decrease
C) remain the same
D) any of the above can occur

Question 24

According to option pricing theory, a higher dividend payout would cause the put option premium to

A) increase
B) decrease
C) remain the same
D) any of the above can occur

Question 25

According to option pricing theory, a higher volatility would cause the call option premium to

A) increase
B) decrease
C) remain the same
D) any of the above can occur

Question 26

According to option pricing theory, a higher volatility would cause the put option premium to

A) increase
B) decrease
C) remain the same
D) any of the above can occur

Question 27

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the intrinsic value?

A) 0
B) 3
C) 4
D) 7

Question 28

If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the time value?

A) 0
B) 3
C) 4
D) 7

Question 29

If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the intrinsic value?

A) 0
B) 1
C) 3
D) 4

Question 30

If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the time value?

A) 0
B) 1
C) 3
D) 4

Question 31

If the stock price is 27, the strike price is 30, and the call premium is 2, the intrinsic value is

A) -2
B) 0
C) 2
D) 3

Question 32

If the stock price is 27, the strike price is 30, and the call premium is 2, the time value is

A) -2
B) 0
C) 2
D) 3

Question 33

If the stock price is 27, the strike price is 30, and the put premium is 5, the intrinsic value is

A) -3
B) 0
C) 3
D) 4

Question 34

If the stock price is 27, the strike price is 30, and the put premium is 5, the time value is

A) -2
B) 0
C) 2
D) 3

Question 35

The delta for a call option will always satisfy which of the following conditions?

A) -1 < delta_c < 0
B) 0 < delta_c < 1
C) -1 < delta_c < 1
D) delta_c > 0

Question 36

The delta for a put option will always satisfy which of the following conditions?

A) -1 < delta_p < 0
B) 0 < delta_p < 1
C) -1 < delta_p < 1
D) delta_p < 0