Baran

 

3、The value of a put option will be higher if, all else equal, the:

A) underlying asset has less volatility.  

B) exercise price is lower.  

C) underlying asset has positive cash flows.  

D) stock price is higher.

Baran

 

The correct answer is C

 

Positive cash flows in the form of dividends will lower the price of the stock making it closer to being "in the money" which increases the value of the option as the stock price gets closer to the strike price.

Baran

 

AIM 7: List and discuss the various methods that estimate future volatility.

1、The implied volatility of interest rates can be best computed using the market price of an:

A) interest rate forward contract. 

B) interest rate futures contract. 

C) interest rate call option contract. 

D) S& 500 option contract.

Baran

 

The correct answer is D

 

Implied volatility of interest rates can be best computed using interest rate option contracts. Forward or futures contract pricing models do not have interest rate volatility as an input. S& 500 option contracts have the volatility of the S& 500 index (and not interest rates) as an input.

Baran

 

2、Which of the following methods is NOT used for estimating volatility inputs for the Black-Scholes model?

A) Using long term historical data. 

B) Using the most current historical data. 

C) Using exponentially weighted historical data. 

D) Models of changing volatility.

Baran

 

The correct answer is D

 

The volatility is constant in the Black-Scholes model.

Baran

 

3、If we use four of the inputs into the Black-Scholes-Merton option-pricing model and solve for the asset price volatility that will make the model price equal to the market price of the option, we have found the:

A) implied volatility.  

B) historical volatility.  

C) market volatility.  

D) option volatility.

Baran

 

The correct answer is A

 

The question describes the process for finding the expected volatility implied by the market price of the option.

Baran

 

4、Which of the following is TRUE for an option's price? An option's price is:

A) a decreasing function of the underlying asset's volatility. 

B) unaffected by changes in the underlying asset's volatility. 

C) an increasing function of the underlying asset's volatility. 

D) a decreasing function of the underlying asset's volatility when it has a long time remaining until expiration and an increasing function of its volatility if the option is close to expiration.

Baran

 

The correct answer is C

 

Since an option has limited risk but significant upside potential, its value always increases when the volatility of the underlying asset increases.