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1、Chapter 21 Option Valuation Multiple Choice Questions1.Before expiration, the time value of an in the money call option is always A)equal to zero. B)positive. C)negative. D)equal to the stock price minus the exercise price. E)none of the above. Answer: B Difficulty: Easy Rationale: The difference be
2、tween the actual option price and the intrinsic value is called the time value of the option.2.Before expiration, the time value of an in the money put option is always A)equal to zero. B)negative. C)positive. D)equal to the stock price minus the exercise price. E)none of the above. Answer: C Diffic
3、ulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option.3.Before expiration, the time value of an at the money call option is always A)positive. B)equal to zero. C)negative. D)equal to the stock price minus the exercise pric
4、e. E)none of the above. Answer: A Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option.4.Before expiration, the time value of an at the money put option is always A)equal to zero. B)equal to the stock price minus th
5、e exercise price. C)negative. D)positive. E)none of the above. Answer: D Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option.5.A call option has an intrinsic value of zero if the option is A)at the money. B)out of
6、the money. C)in the money. D)A and C. E)A and B. Answer: E Difficulty: Easy Rationale: Intrinsic value can never be negative; thus it is set equal to zero for out of the money and at the money options.6.A put option has an intrinsic value of zero if the option is A)at the money. B)out of the money.
7、C)in the money. D)A and C. E)A and B. Answer: E Difficulty: Easy Rationale: Intrinsic value can never be negative; thus it is set equal to zero for out of the money and at the money options.7.Prior to expiration A)the intrinsic value of a call option is greater than its actual value. B)the intrinsic
8、 value of a call option is always positive. C)the actual value of call option is greater than the intrinsic value. D)the intrinsic value of a call option is always greater than its time value. E)none of the above. Answer: C Difficulty: Moderate Rationale: Prior to expiration, any option will be sell
9、ing for a positive price, thus the actual value is greater than the intrinsic value.8.Prior to expiration A)the intrinsic value of a put option is greater than its actual value. B)the intrinsic value of a put option is always positive. C)the actual value of put option is greater than the intrinsic v
10、alue. D)the intrinsic value of a put option is always greater than its time value. E)none of the above. Answer: C Difficulty: Moderate Rationale: Prior to expiration, any option will be selling for a positive price, thus the actual value is greater than the intrinsic value.9.If the stock price incre
11、ases, the price of a put option on that stock _ and that of a call option _. A)decreases, increases B)decreases, decreases C)increases, decreases D)increases, increases E)does not change, does not change Answer: A Difficulty: Moderate Rationale: As stock prices increases, call options become more va
12、luable (the owner can buy the stock at a bargain price). As stock prices increase, put options become less valuable (the owner can sell the stock at a price less than market price).10.If the stock price decreases, the price of a put option on that stock _ and that of a call option _. A)decreases, in
13、creases B)decreases, decreases C)increases, decreases D)increases, increases E)does not change, does not change Answer: C Difficulty: Moderate Rationale: As stock prices decreases, call options become less valuable (the owner can buy the stock at a bargain price). As stock prices decreases, put opti
14、ons become more valuable (the owner can sell the stock at a price less than market price).11.Other things equal, the price of a stock call option is positively correlated with the following factors except A)the stock price. B)the time to expiration. C)the stock volatility. D)the exercise price. E)no
15、ne of the above. Answer: D Difficulty: Moderate Rationale: The exercise price is negatively correlated with the call option price.12.Other things equal, the price of a stock put option is positively correlated with the following factors except A)the stock price. B)the time to expiration. C)the stock
16、 volatility. D)the exercise price. E)none of the above. Answer: A Difficulty: Moderate Rationale: The exercise price is negatively correlated with the stock price.13.The price of a stock put option is _ correlated with the stock price and _ correlated with the striking price. A)positively, positivel
17、y B)negatively, positively C)negatively, negatively D)positively, negatively E)not, not Answer: B Difficulty: Moderate Rationale: The lower the stock price, the more valuable the call option. The higher the striking price, the more valuable the put option.14.The price of a stock call option is _ cor
18、related 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 Answer: D Difficulty: Moderate Rationale: The lower the stock price, the more valuable the call option. The higher the
19、 striking price, the more valuable the put option.15.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
20、)none of the above. Answer: D Difficulty: Moderate Rationale: The variance of the returns of the underlying asset is not directly observable, but must be estimated from historical data, from scenario analysis, or from the prices of other options.16.Delta is defined as A)the change in the value of an
21、 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 o
22、f the underlying stock price. E)none of the above. Answer: A Difficulty: Moderate Rationale: An options hedge ratio (delta) is the change in the price of an option for $1 increase in the stock price.17.A hedge ratio of 0.70 implies that a hedged portfolio should consist of A)long 0.70 calls for each
23、 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. Answer: C Difficulty: Moderate Rationale: The hedge ratio is the slope of the option value as a function of the stock value. A slope of 0.70 means
24、 that as the stock increases in value by $1, the option increases by approximately $0.70. Thus, for every call written, 0.70 shares of stock would be needed to hedge the investors portfolio.18.A hedge ratio for a call option is _ and a hedge ratio for a put option is _. A)negative, positive B)negati
25、ve, negative C)positive, negative D)positive, positive E)zero, zero Answer: C Difficulty: Moderate Rationale: 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 1.0.19.A hedge ratio for a call is always A)equal to o
26、ne. B)greater than one. C)between zero and one D)between minus one and zero. E)of no restricted value Answer: C Difficulty: Moderate Rationale: See rationale for test bank question 21.18.20.A hedge ratio for a put is always A)equal to one. B)greater than one. C)between zero and one D)between minus o
27、ne and zero. E)of no restricted value Answer: D Difficulty: Moderate Rationale: See rationale for test bank question 21.18.21.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
28、stock. C)negatively correlated with the change in the value of the stock. D)B and C. E)A and C. Answer: A Difficulty: Moderate Rationale: The slope of the call option valuation function is less than one.22.The percentage change in the stock call option price divided by the percentage change in the s
29、tock 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. Answer: A Difficulty: Moderate Rationale: Option price elasticity measures the percent change in the option price as a function of the percent ch
30、ange in the stock price.23.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. Answer: A Difficulty: Moderate Rationale: Option prices are much more volatile than stock prices, as option premiums are much lower than sto
31、ck prices.24.The elasticity of a stock put option is always A)positive. B)smaller than one. C)negative D)infinite E)none of the above. Answer: C Difficulty: Moderate Rationale: As put options become more valuable as stock prices decline, the elasticity of a put option must be negative.25.Portfolio A
32、 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 in
33、creases and B if it decreases. E)B if the stock price decreases and A if it increases. Answer: A Difficulty: Difficult Rationale: 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.26.Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B co
34、nsists of 800 shares of stock. The call delta is 0.6. 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
35、increases. Answer: C Difficulty: Difficult Rationale: 500 calls (0.6) = 300 shares + 500 shares = 800 shares; 800 shares = 800 shares.27.Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a
36、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. Answer: B Difficulty: Difficult Rationale: 400 calls (0.5) = 200
37、shares + 400 shares = 600 shares; 500 shares = 500 shares.28.Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price? A)Portfolio B B)Portfolio
38、 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. Answer: B Difficulty: Difficult Rationale: 300 calls (0.3) = 90 shares + 600 shares = 690 shares; 685 shares = 685 shares.29.A portfolio cons
39、ists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price? A)+$700 B)+$500 C)-$1,150 D)-$520 E)none of the above Answer: C Difficulty: Difficul
40、t Rationale: -$100 + -$1,500(0.7) = -$1,150.30.A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5. What would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price? A)+$700 B)-$850 C)-$58
41、0 D)-$520 E)none of the above Answer: B Difficulty: Difficult Rationale: -$800 + -$100(0.5) = -$850.31.A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a one d
42、ollar decline in the stock price? A)-$345 B)+$500 C)-$580 D)-$520 E)none of the above Answer: A Difficulty: Difficult Rationale: -$225 + -$300(0.4) = -$345.32.A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar cha
43、nge in the value of the portfolio in response to a one dollar decline in the stock price? A)+$700 B)+$500 C)-$580 D)-$520 E)none of the above Answer: D Difficulty: Difficult Rationale: -$400 + -$200(0.6) = -$520.33.If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same
44、expiration date and exercise price as the call would be _. A)0.70 B)0.30 C)-0.70 D)-0.30 E)-.17 Answer: C Difficulty: Difficult Rationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.3 - 1.0 = -0.7.34.If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same e
45、xpiration date and exercise price as the call would be _. A)0.30 B)0.50 C)-0.60 D)-0.50 E)-.17 Answer: D Difficulty: Difficult Rationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.5 - 1.0 = -0.5.35.If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be _.