Question 1

All else equal call option values are _____ if the _____ is lower.
A) higher; stock price
B) higher; exercise price
C) lower; dividend payout
D) lower; stock volatility

Accepted Answer

Call option values are higher if the exercise price is lower, as it becomes cheaper to buy the stock at a lower price.

Question 2

A call option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _____ intrinsic value and _____ time value.
A) negative; positive
B) positive; negative
C) zero; zero
D) zero; positive

Accepted Answer

The intrinsic value of an option is the difference between the stock price and the strike price, only when it's favorable to the option holder. Since the stock price ($50) is below the strike price ($55) for a call option, its intrinsic value is zero. However, because the option has several months until expiration, it has positive time value due to the potential for the stock price to rise above the strike price in the future.

Question 3

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.
A) nominal model
B) binomial model
C) time model
D) Black-Scholes model

Accepted Answer

The option valuation model based on the assumption that stock prices can move to only two values over any short time period is called a binomial model. The other options listed are not specific models used for option valuation.

Question 4

The value of a put option increases with all of the following except ___________.
A) stock price
B) time to maturity
C) volatility
D) dividend yield

Accepted Answer

The value of a put option typically decreases as the stock price increases, because a put option gives the holder the right to sell the underlying asset at a specified price, and if the market price is higher, the option is less valuable. Increases in time to maturity and volatility generally increase the value of a put option, as does a decrease in dividend yield, since dividends reduce the price of the underlying stock.

Question 5

The __________ is the stock price minus exercise price,or the profit that could be attained by immediate exercise of an in-the-money call option.
A) intrinsic value
B) time value
C) stated value
D) discounted value

Accepted Answer

The intrinsic value is the profit that could be attained by immediate exercise of an in-the-money call option, which is calculated as the stock price minus exercise price. The other options (B, C, and D) are not relevant to this calculation.

Question 6

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium,that standard deviation would be called the _______.
A) variability
B) volatility
C) implied volatility
D) deviance

Accepted Answer

The standard deviation consistent with the current market call premium is called the implied volatility, which is a measure of how much the market expects the price of the underlying asset to move in the future.

Question 7

The intrinsic value of a call option is equal to _______________.
A) the stock price minus the exercise price
B) the exercise minus the stock price
C) the stock price minus the exercise price plus any expected dividends
D) the exercise price minus the stock price plus any expected dividends

Accepted Answer

The intrinsic value of a call option is the amount by which the stock price exceeds the exercise price. If the stock price is higher than the exercise price, the option has intrinsic value.

Question 8

The value of a call option increases with all of the following except ___________.
A) stock price
B) time to maturity
C) volatility
D) dividend yield

Accepted Answer

A higher dividend yield reduces the present value of future cash flows to the holder of the call option, which decreases the value of the option.

Question 9

Investor A bought a call option and Investor B bought a put option.All else equal if the underlying stock price volatility increases the value of Investor A's position will ______ and the value of Investor B's position will _______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

Both call and put options increase in value with higher volatility because the potential for larger price movements increases the likelihood of the options being profitable.

Question 10

The _________ is the difference between the actual call price and the intrinsic value.
A) stated value
B) strike value
C) time value
D) binomial value

Accepted Answer

The difference between the actual call price and the intrinsic value is known as the time value. The stated value refers to the value assigned to stock when it is first offered by a company. The strike value is the price at which a call option can be exercised. The binomial value is a method used in financial mathematics for pricing options.

Question 11

A 45 put option on a stock priced at $50 is priced at $3.50.This call has an intrinsic value of ______ and a time value of _____.
A) $3.50; $0
B) $5.00; $3.50
C) $3.50; $5.00
D) $0; $3.50

Accepted Answer

The intrinsic value of a put option is the amount by which the strike price exceeds the stock price. Since the stock price ($50) is above the strike price ($45), the intrinsic value is $0. The time value is the option price ($3.50) minus the intrinsic value ($0), which equals $3.50.

Question 12

The percentage change in the stock call option price divided by the percentage change in the stock price is the __________ of the option.
A) delta
B) elasticity
C) gamma
D) theta

Accepted Answer

The percentage change in the stock call option price divided by the percentage change in the stock price is known as option elasticity. Delta refers to the ratio between the change in the price of an option and the change in the price of the underlying asset. Gamma refers to the rate of change of an option's delta in response to changes in the underlying asset's price. Theta refers to the rate at which the price of an option decreases over time due to the passage of time.

Question 13

A 45 call option on a stock priced at $50 is priced at $6.50.This call has an intrinsic value of ______ and a time value of _____.
A) $6.50; $0
B) $5.00; $1.50
C) $1.50; $5.00
D) $0; $6.50

Accepted Answer

The intrinsic value of the call option is the difference between the stock price and the strike price, which is $50 - $45 = $5. Therefore, the time value of the option is the difference between the total price of the option and its intrinsic value, which is $6.50 - $5 = $1.50. Therefore, the best choice is B, which shows that the option has an intrinsic value of $5.00 and a time value of $1.50.

Question 14

A put option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _____ intrinsic value and _____ time value.
A) negative; positive
B) positive; positive
C) zero; zero
D) zero; positive

Accepted Answer

The answer of A put option with several months until...

Question 15

Investor A bought a call option and Investor B bought a put option.All else equal if the interest rate increases the value of Investor A's position will ______ and the value of Investor B's position will _______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

An increase in interest rates will lead to an increase in the value of Investor A's call option as the underlying asset is expected to appreciate in the future. On the other hand, an increase in interest rates will lead to a decrease in the value of Investor B's put option as the underlying asset is expected to depreciate in the future.

Question 16

Investor A bought a call option that expires in 6 months.Investor B wrote a put option with a 9 month maturity.All else equal as the time to expiration approaches the value of Investor A's position will _______ and the value of Investor B's position will _______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

As time to expiration approaches, the time value of a call option decreases, reducing its value (Investor A's position). For a written put option, the time decay benefits the writer, potentially increasing the value of Investor B's position.

Question 17

The hedge ratio is often called the option's _______.
A) delta
B) gamma
C) theta
D) beta

Accepted Answer

The hedge ratio is often referred to as the option's delta, which measures the change in the option's value in response to a change in the underlying asset's price.

Question 18

Before expiration the time value of an out-of-the money stock option is __________.
A) equal to the stock price minus the exercise price
B) equal to zero
C) negative
D) positive

Accepted Answer

The time value of an out-of-the-money stock option is positive because it reflects the potential for the option to gain intrinsic value before expiration.

Question 19

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.
A) the option is deep in the money
B) the option is approximately at the money
C) the option is far out of the money
D) time to expiration is very low

Accepted Answer

The divergence between an option's intrinsic value and its market value is usually greatest when the option is approximately at the money. This is because the uncertainty about whether it will end up in or out of the money at expiration is highest, leading to a greater impact of time value and implied volatility on the option's price.

Question 20

The Black-Scholes option pricing formula was developed for __________.
A) American options
B) European options
C) Tokyo options
D) out-of-the-money options

Accepted Answer

The Black-Scholes option pricing formula was developed specifically for European options.

Quiz 16: Option Valuation

All else equal call option values are _ if the _ is lower.

A call option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _ intrinsic value and _ time value.

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

The value of a put option increases with all of the following except ___________.

The __________ is the stock price minus exercise price,or the profit that could be attained by immediate exercise of an in-the-money call option.

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium,that standard deviation would be called the _______.

The intrinsic value of a call option is equal to _______________.

The value of a call option increases with all of the following except ___________.

Investor A bought a call option and Investor B bought a put option.All else equal if the underlying stock price volatility increases the value of Investor A's position will and the value of Investor B's position will _.

The _________ is the difference between the actual call price and the intrinsic value.

A 45 put option on a stock priced at $50 is priced at $3.50.This call has an intrinsic value of __ and a time value of _.

The percentage change in the stock call option price divided by the percentage change in the stock price is the __________ of the option.

A 45 call option on a stock priced at $50 is priced at $6.50.This call has an intrinsic value of __ and a time value of _.

A put option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _ intrinsic value and _ time value.

Investor A bought a call option and Investor B bought a put option.All else equal if the interest rate increases the value of Investor A's position will and the value of Investor B's position will _.

Investor A bought a call option that expires in 6 months.Investor B wrote a put option with a 9 month maturity.All else equal as the time to expiration approaches the value of Investor A's position will _ and the value of Investor B's position will _.

The hedge ratio is often called the option's _______.

Before expiration the time value of an out-of-the money stock option is __________.

The divergence between an option's intrinsic value and its market value is usually greatest when ___________________.

The Black-Scholes option pricing formula was developed for __________.