Question 1

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.
A)positively, positively
B)negatively, positively
C)negatively, negatively
D)positively, negatively
E)not,not

Accepted Answer

A put option gives the holder the right to sell a stock at a specific price (the striking price) at a later date. As the stock price decreases, the put option becomes more valuable and its price increases. This means that the price of a stock put option is negatively correlated with the stock price, which is why option prices are said to be "inversely related" to the stock price. On the other hand, the price of a stock put option is positively correlated with the striking price, as a higher striking price means the option is more valuable since the holder can sell the stock for a higher price. Therefore, option prices are directly related to the striking price.

Question 2

A hedge ratio for a call is always
A)equal to one.
B)greater than one.
C)between zero and one.
D)between minus one and zero.
E)of no restricted value.

Accepted Answer

The hedge ratio for a call option is defined as the ratio of the delta of the call option to the underlying asset. Since the delta of a call option ranges from 0 to 1, the hedge ratio will always be between 0 and 1. This is because the delta of a call option measures the change in the option price relative to the change in the underlying asset price, and therefore the hedge ratio represents the proportion of the underlying asset that needs to be bought or sold to hedge the call option position.

Question 3

A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A)long 0.70 calls for each short stock.
B)short 0.70 calls for each long stock.
C)long 0.70 shares for each short call.
D)long 0.70 shares for each long call.
E)none of the above.

Accepted Answer

A hedge ratio of 0.70 means that for each option (call) position, you should hold 0.70 shares of the underlying stock to create a delta-neutral position.

Question 4

Volatility risk is
A)the volatility level for the stock that the option price implies.
B)the risk incurred from unpredictable changes in volatility.
C)the percentage change in the stock call option price divided by the percentage change in the stock price.
D)the sensitivity of the delta to the stock price.
E)A and C.

Accepted Answer

Volatility risk refers to the risk of changes in the volatility of an underlying asset. This risk is incurred due to the unpredictability of the volatility of the asset, which can impact the value of options and other derivative instruments. Option pricing models take volatility into account, and the implied volatility level for a stock can be derived from the option prices. However, this implied volatility may not accurately reflect the actual future volatility of the stock, and unexpected changes in volatility can lead to losses. Therefore, the correct answer is B.

Question 5

All the inputs in the Black-Scholes Option Pricing Model are directly observable except
A)the price of the underlying security.
B)the risk free rate of interest.
C)the time to expiration.
D)the variance of returns of the underlying asset return.
E)none of the above.

Accepted Answer

The variance of returns of the underlying asset return is not directly observable as it is based on past data and is subject to future uncertainty. It is estimated using historical data or implied volatility from options prices. The other inputs, namely, the price of the underlying security, the risk-free rate of interest, and the time to expiration are all directly observable.

Question 6

A hedge ratio of 0.85 implies that a hedged portfolio should consist of
A)long 0.85 calls for each short stock.
B)short 0.85 calls for each long stock.
C)long 0.85 shares for each short call.
D)long 0.85 shares for each long call.
E)none of the above.

Accepted Answer

A hedge ratio of 0.85 means that for each short call, you should hold 0.85 shares of the underlying stock to hedge the position effectively.

Question 7

The percentage change in the stock call option price divided by the percentage change in the stock price is called
A)the elasticity of the option.
B)the delta of the option.
C)the theta of the option.
D)the gamma of the option.
E)none of the above.

Accepted Answer

The elasticity of the option measures the percentage change in the option price relative to the percentage change in the stock price.

Question 8

Which of the inputs in the Black-Scholes Option Pricing Model are directly observable
A)the price of the underlying security.
B)the risk free rate of interest.
C)the time to expiration.
D)the variance of returns of the underlying asset return.
E)A,B,and C

Accepted Answer

The price of the underlying security, the risk-free rate of interest, and the time to expiration are all directly observable inputs in the Black-Scholes Option Pricing Model. The variance of returns of the underlying asset return is not directly observable and needs to be estimated or implied from historical data or market prices. Therefore, the best choice is E, which includes all three directly observable inputs.

Question 9

The elasticity of a stock put option is always
A)positive.
B)smaller than one.
C)negative.
D)infinite.
E)none of the above.

Accepted Answer

The elasticity of a stock put option is always negative. This is because the price of the option will decrease as the price of the underlying stock increases. As such, the percentage change in price of the option will always be negative when there is a positive percentage change in the price of the stock.

Question 10

A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.
A)negative, positive
B)negative, negative
C)positive, negative
D)positive, positive
E)zero,zero

Accepted Answer

The hedge ratio for a call option is positive because it measures the amount of the underlying asset needed to offset the price movement of the call option. If the underlying asset price goes up, the call option price will also increase. Therefore, to hedge against this movement, the investor needs to buy the underlying asset. The hedge ratio for a put option is negative because the investor needs to short sell the underlying asset to hedge against the price movement of the put option. As the underlying asset price goes down, the put option price will increase.

Question 11

The dollar change in the value of a stock call option is always
A)lower than the dollar change in the value of the stock.
B)higher than the dollar change in the value of the stock.
C)negatively correlated with the change in the value of the stock.
D)B and C.
E)A and C.

Accepted Answer

The answer of The dollar change in the value of...

Question 12

A hedge ratio for a put is always
A)equal to one.
B)greater than one.
C)between zero and one.
D)between minus one and zero.
E)of no restricted value.

Accepted Answer

Call option hedge ratios must be positive and less than 1.0, and put option ratios must be negative, with a smaller absolute value than 1.0.

Question 13

The elasticity of a stock call option is always
A)greater than one.
B)smaller than one.
C)negative.
D)infinite.
E)none of the above.

Accepted Answer

The elasticity of a stock call option, which measures the percentage change in the option's price relative to the percentage change in the underlying stock's price, is always greater than one because options provide leverage.

Question 14

The gamma of an option is
A)the volatility level for the stock that the option price implies.
B)the continued updating of the hedge ratio as time passes.
C)the percentage change in the stock call option price divided by the percentage change in the stock price.
D)the sensitivity of the delta to the stock price.
E)A and C.

Accepted Answer

Gamma measures the rate of change of delta with respect to changes in the underlying asset's price, indicating how sensitive the delta is to the stock price.

Question 15

Delta is defined as
A)the change in the value of an option for a dollar change in the price of the underlying asset.
B)the change in the value of the underlying asset for a dollar change in the call price.
C)the percentage change in the value of an option for a one percent change in the value of the underlying asset.
D)the change in the volatility of the underlying stock price.
E)none of the above.

Accepted Answer

Delta measures the change in the value of an option for a one dollar change in the price of the underlying asset.

Question 16

Portfolio A consists of 150 shares of stock and 300 calls on that stock.Portfolio B consists of 575 shares of stock.The call delta is 0.7.Which portfolio has a higher dollar exposure to a change in stock price?
A)Portfolio B.
B)Portfolio A.
C)The two portfolios have the same exposure.
D)A if the stock price increases and B if it decreases.
E)B if the stock price decreases and A if it increases.

Accepted Answer

Portfolio B has a higher dollar exposure because it consists of 575 shares, while Portfolio A's exposure is 150 shares plus 300 calls with a delta of 0.7, which equals 360 shares (150 + 300*0.7). 575 shares is greater than 360 shares.

Question 17

The elasticity of an option is
A)the volatility level for the stock that the option price implies.
B)the continued updating of the hedge ratio as time passes.
C)the percentage change in the stock call option price divided by the percentage change in the stock price.
D)the sensitivity of the delta to the stock price.
E)A and C.

Accepted Answer

The elasticity of an option is defined as the percentage change in the option price divided by the percentage change in the underlying stock price. This reflects the sensitivity of the option price to changes in the stock price and is a measure of its responsiveness. Option elasticity is a key concept in options trading and can be used to determine the potential risk and reward of different options strategies.

Question 18

Dynamic hedging is
A)the volatility level for the stock that the option price implies.
B)the continued updating of the hedge ratio as time passes.
C)the percentage change in the stock call option price divided by the percentage change in the stock price.
D)the sensitivity of the delta to the stock price.
E)A and C.

Accepted Answer

Dynamic hedging is the continuous adjustment of a hedging position as time passes and market conditions change. This involves updating the hedge ratio, which is the ratio of the number of options contracts to the number of shares of the underlying asset needed to create a delta-neutral portfolio. Options traders who engage in dynamic hedging are constantly monitoring the options prices and their corresponding deltas, and making adjustments to the hedge as necessary.

Question 19

Delta neutral
A)is the volatility level for the stock that the option price implies.
B)is the continued updating of the hedge ratio as time passes.
C)is the percentage change in the stock call option price divided by the percentage change in the stock price.
D)means the portfolio has no tendency to change value as the underlying portfolio value changes.
E)A and C.

Accepted Answer

Delta neutral means that the portfolio's value remains unchanged with small changes in the underlying asset's value. It is achieved by balancing the delta of the options with the delta of the underlying asset. Therefore, option A and C are incorrect, and option B refers to the process of maintaining delta neutrality.

Question 20

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price.
A)positively, positively
B)negatively, positively
C)negatively, negatively
D)positively, negatively
E)not,not

Accepted Answer

The higher the stock price, the more valuable the call option.The lower the striking price, the more valuable the call option.

Quiz 21: Macroeconomic and Industry Analysis

The price of a stock put option is correlated with the stock price and correlated with the striking price.

A hedge ratio for a call is always

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

Volatility risk is

All the inputs in the Black-Scholes Option Pricing Model are directly observable except

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

The percentage change in the stock call option price divided by the percentage change in the stock price is called

Which of the inputs in the Black-Scholes Option Pricing Model are directly observable

The elasticity of a stock put option is always

A hedge ratio for a call option is __ and a hedge ratio for a put option is .

The dollar change in the value of a stock call option is always

A hedge ratio for a put is always

The elasticity of a stock call option is always

The gamma of an option is

Delta is defined as

Portfolio A consists of 150 shares of stock and 300 calls on that stock.Portfolio B consists of 575 shares of stock.The call delta is 0.7.Which portfolio has a higher dollar exposure to a change in stock price?

The elasticity of an option is

Dynamic hedging is

Delta neutral

The price of a stock call option is correlated with the stock price and correlated with the striking price.