Question 1

Which one of the following variables is NOT included in the Black-Scholes option pricing model?
A)strike price
B)time remaining until option expiration
C)stock volatility as measured by standard deviation
D)stock price
E)market rate of return

Accepted Answer

The Black-Scholes option pricing model does not include the market rate of return as a variable. It only takes into account the strike price, time remaining until option expiration, stock volatility as measured by standard deviation, and stock price in the calculation of the option price.

Question 2

Which option price(s)will increase when the interest rate increases?
A)both the call and put
B)call only
C)put only
D)neither the call nor the put
E)Answer cannot be determined from the information provided.

Accepted Answer

The price of a call option increases with an increase in interest rates due to the cost of carry. Higher interest rates increase the cost of holding a position, which is reflected in the price of call options. Put options, however, do not necessarily increase in value with higher interest rates and can actually decrease in value, making "call only" the correct choice.

Question 3

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?
A)Put and call prices increase at the same rate as the time to option maturity increases.
B)Put prices and time to maturity are inversely related.
C)Call prices tend to increase faster than put prices as the time to option maturity increases.
D)Put prices increase while call prices remain constant as the time to option maturity increases.
E)Call prices are inversely related to time to maturity.

Accepted Answer

As the time to option maturity increases, the probability of the underlying asset's price rising above the strike price (in the case of a call option) also increases. This leads to an increase in demand for call options and consequently, an increase in their prices. On the other hand, put options become less attractive as the time to expiration increases because the likelihood of the underlying price falling below the strike price decreases. Hence, while put prices may increase, they do so at a slower rate than call prices.

Question 4

Which one of the following situations will produce the highest call price,all else constant?
A)$29 stock price; $30 strike price
B)$41 stock price; $40 strike price
C)$20 stock price; $20 strike price
D)$34 stock price; $35 strike price
E)$24 stock price; $25 strike price

Accepted Answer

The call price increases as the difference between the stock price and the strike price increases, assuming all else is constant. Among the given options, option B ($41 stock price; $40 strike price) has the highest positive difference, indicating the highest intrinsic value and thus the highest call price.

Question 5

An increase in which one of the following will have a negative effect on the price of a call option?
A)option strike price
B)time remaining to option expiration
C)underlying stock price
D)volatility of the underlying stock price
E)risk-free interest rate

Accepted Answer

An increase in the option strike price makes it less likely that the option will end up in-the-money at expiration, which negatively affects the price of a call option. Higher strike prices mean the underlying stock has to increase more for the option to be profitable, reducing the call option's value.

Question 6

You know that a call will finish in-the-money.Based on that single piece of information,you also know which one of the following?
A)The stock price will equal the strike price at expiration.
B)The risk-free rate is zero percent.
C)A put on the same underlying asset with the same strike and expiration will finish out-of-the-money.
D)The strike price will exceed the stock price at expiration.
E)The price of the call is equal to the price of the put.

Accepted Answer

If a call finishes in-the-money, it means that the stock price has gone above the strike price. Therefore, a put on the same underlying asset with the same strike and expiration will finish out-of-the-money as the stock price would need to be below the strike price for the put to be in-the-money. The other choices are not necessarily true based on the given information.

Question 7

Which one of the following terms is used as a shortcut means of saying "time to maturity"?
A)holder
B)expiry
C)timing
D)elapsing
E)dating

Accepted Answer

Expiry is the term used to refer to the time to maturity of an option or other financial instrument.

Question 8

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma,and call and put prices is correct?
A)Call and put prices react fairly similarly in response to changes in sigma.
B)Call prices increase and put prices decrease as sigma increases.
C)Put price increase and call prices decrease as sigma increases.
D)Call prices increase and put prices remain relatively constant and sigma increases.
E)Neither put nor call prices are affected by changes in sigma.

Accepted Answer

The answer of Which one of the following statements concerning...

Question 9

An increase in which two of the following will have a negative effect on the value of a put option?
I.risk-free interest rate
II.time to option maturity
III.underlying stock price
IV.option strike price
A)I and II only
B)I and III only
C)II and III only
D)II and IV only
E)III and IV only

Accepted Answer

An increase in the risk-free interest rate (I) will increase the cost of carrying the underlying asset and the put option, thus decreasing the value of the put option. An increase in the underlying stock price (III) will decrease the intrinsic value of the put option, which is the difference between the option strike price and the current stock price. Therefore, options holders will be less likely to exercise their put option, leading to a decrease in the put option value. An increase in time to option maturity (II) and option strike price (IV) will increase the value of the put option, as more time to expiration and a higher strike price will give the underlying asset more time to decrease in value, increasing the potential profit of the put option holder. Therefore, an increase in (II) and (IV) will have a positive effect on the value of a put option.

Question 10

Which one of the following is defined as an estimate of stock price volatility obtained from an option price?
A)calculated alpha
B)estimated variance
C)implied theta
D)VIX
E)implied standard deviation

Accepted Answer

Implied standard deviation is the estimate of stock price volatility obtained from an option price. It is also known as implied volatility.

Question 11

Which two of the following have the greatest effect on stock option prices?
I.volatility of underlying stock price
II.time to option maturity
III.underlying stock price
IV.option strike price
A)I and II only
B)I and IV only
C)II and III only
D)II and IV only
E)III and IV only

Accepted Answer

The answer of Which two of the following have the...

Question 12

Which one of the following statements concerning option prices is correct?
A)There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices.
B)Call option prices decrease and put option prices increase as the time to expiration increases.
C)Put option prices are directly related to the price of the underlying stock.
D)The relationship between option prices and stock prices is a linear relationship.
E)Delta measures the effect that the underlying stock's dividend yield has on option prices.

Accepted Answer

Option prices generally increase with the volatility of the underlying stock because higher volatility increases the probability of the option ending in the money. This relationship is not linear but is direct, making A the correct choice.

Question 13

Employee stock options grant an employee which one of the following rights?
A)right to sell shares in an S&P 500 index fund
B)right to buy shares in an S&P 500 index fund
C)right to sell shares of the employer's stock
D)right to buy shares of the employer's stock
E)right to buy shares in the employer's retirement plan

Accepted Answer

Employee stock options grant the employee the right to buy shares of the employer's stock at a predetermined price, known as the exercise price. This allows employees to potentially profit from the increase in the company's stock price over time.

Question 14

Which of the following will result from a decrease in an option's strike price?
I.increase in call option price
II.decrease in call option price
III.increase in put option price
IV.decrease in put option price
A)I only
B)I and III only
C)I and IV only
D)II and III only
E)II and IV only

Accepted Answer

Decreasing an option's strike price makes a call option more valuable (since it's cheaper to buy the stock at the lower strike price), hence increasing its price. Conversely, it makes a put option less valuable (since selling the stock at the lower strike price is less attractive), hence decreasing its price.

Question 15

VIX represents the volatility index on which one of the following?
A)Wilshire 3000 index
B)DJIA
C)S&P 500 index
D)Dow Jones Transportation average
E)NASDAQ 100

Accepted Answer

VIX represents the CBOE Volatility Index on the S&P 500 index.

Question 16

Which option price(s)will increase when the dividend yield increases?
A)both the call and put
B)call only
C)put only
D)neither the call nor the put
E)Answer cannot be determined from the information provided.

Accepted Answer

When the dividend yield increases, it leads to a decrease in the stock price. This, in turn, leads to a decrease in the price of the call option (as the stock price is a component of the call option price) and an increase in the price of the put option (as the put option price is negatively correlated with the stock price). Therefore, only the put option price will increase when dividend yield increases.

Question 17

Which one of the following best describes the graphical relationship between stock prices and option prices?
A)linearity
B)concavity
C)convexity
D)hyperbolic
E)exponential

Accepted Answer

The graphical relationship between stock prices and option prices is convex, as the option's value will increase at a decreasing rate as the stock price increases. This can be seen in the shape of the option price curve, where the slope of the curve decreases as it moves away from the origin.

Question 18

Which one of the following is another term for implied volatility?
A)implied delta
B)implied standard deviation
C)implied alpha
D)implied beta
E)implied gamma

Accepted Answer

Implied volatility is commonly measured as implied standard deviation, which represents the level of volatility that is implied by the market price of an option. The other answer choices are not related to implied volatility.

Question 19

Which one of the following statements is correct concerning the Black-Scholes option pricing model?
A)The model assumes a stock pays a constant annual dividend.
B)The model expresses time in terms of years.
C)The model is based on American-style options.
D)The model assumes that the current stock price is equal to the strike price.
E)The model assumes the put is in-the-money.

Accepted Answer

The Black-Scholes option pricing model expresses time in terms of years. It does not assume a stock pays a constant annual dividend, is based on European-style options, assumes the current stock price is not equal to the strike price, and can be used for both in-the-money and out-of-the-money options.

Question 20

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?
A)volatility of the underlying stock price
B)risk-free interest rate
C)underlying stock price
D)option strike price
E)time to maturity

Accepted Answer

Delta measures the dollar impact of a change in the underlying stock price on the value of a stock option.

Quiz 16: Option Valuation

Which one of the following variables is NOT included in the Black-Scholes option pricing model?

Which option price(s) will increase when the interest rate increases?

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?

Which one of the following situations will produce the highest call price,all else constant?

An increase in which one of the following will have a negative effect on the price of a call option?

You know that a call will finish in-the-money.Based on that single piece of information,you also know which one of the following?

Which one of the following terms is used as a shortcut means of saying "time to maturity"?

Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma,and call and put prices is correct?

An increase in which two of the following will have a negative effect on the value of a put option? I.risk-free interest rate II.time to option maturity III.underlying stock price IV.option strike price

Which one of the following is defined as an estimate of stock price volatility obtained from an option price?

Which two of the following have the greatest effect on stock option prices? I.volatility of underlying stock price II.time to option maturity III.underlying stock price IV.option strike price

Which one of the following statements concerning option prices is correct?

Employee stock options grant an employee which one of the following rights?

Which of the following will result from a decrease in an option's strike price? I.increase in call option price II.decrease in call option price III.increase in put option price IV.decrease in put option price

VIX represents the volatility index on which one of the following?

Which option price(s) will increase when the dividend yield increases?

Which one of the following best describes the graphical relationship between stock prices and option prices?

Which one of the following is another term for implied volatility?

Which one of the following statements is correct concerning the Black-Scholes option pricing model?

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?