HuskyGrad2010

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

A) exercise price is lower.

B) underlying asset has positive cash flows.

C) underlying asset has less volatility.

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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.

HuskyGrad2010

Compared to the value of a call option on a stock with no dividends, a call option on an identical stock expected to pay a dividend during the term of the option will have a:

A) lower value in all cases.

B) lower value only if it is an American style option.

C) higher value only if it is an American style option.

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An expected dividend during the term of an option will decrease the value of a call option.

HuskyGrad2010

Dividends on a stock can be incorporated into the valuation model of an option on the stock by:

A) subtracting the present value of the dividend from the current stock price.

B) adding the present value of the dividend to the current stock price.

C) subtracting the future value of the dividend from the current stock price.

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The option pricing formulas can be adjusted for dividends by subtracting the present value of the expected dividend(s) from the current asset price.

HuskyGrad2010

In order to compute the implied asset price volatility for a particular option, an investor:

A) must have a series of asset prices.

B) must have the market price of the option.

C) does not need to know the risk-free rate.

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In order to compute the implied volatility we need the risk-free rate, the current asset price, the time to expiration, the exercise price, and the market price of the option.

HuskyGrad2010

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 exponentially weighted historical data.

C) Models of changing volatility.

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The volatility is constant in the Black-Scholes model

HuskyGrad2010

Which of the following best describes the implied volatility method for estimated volatility inputs for the Black-Scholes model? Implied volatility is found:

A) using historical stock price data.

B) using the most current stock price data.

C) by solving the Black-Scholes model for the volatility using market values for the stock price, exercise price, interest rate, time until expiration, and option price.

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Implied volatility is found by “backing out” the volatility estimate using the current option price and all other values in the Black-Scholes model.

HuskyGrad2010

Which of the following best explains the sensitivity of a call option's value to volatility? Call option values:

A) increase as the volatility of the underlying asset increases because investors are risk seekers.

B) increase as the volatility of the underlying asset increases because call options have limited risk but unlimited upside potential.

C) are not affected by changes in the volatility of the underlying asset.

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A higher volatility makes it more likely that options end up in the money and can be exercised profitably, while the down side risk is strictly limited to the option premium.

HuskyGrad2010

Which of the following statements concerning vega is most accurate? Vega is greatest when an option is:

A) far in the money.

B) far out of the money.

C) at the money.

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When the option is at the money, changes in volatility will have the greatest affect on the option value.

HuskyGrad2010

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) option volatility.

C) historical volatility.

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

HuskyGrad2010

At time = 0, for a put option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in:

A) the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.

B) a risk-free pure-discount bond that pays FT – X at option expiration and long in a put at X.

C) a call at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.

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Utilizing the basic put/call parity equation, we're looking for a portfolio that is equal to the portfolio mentioned in the stem (a put option). The put-call parity equation is c0 + (X – FT) / (1+R)T = p0. Since (X – FT) / (1+R) is actually just the present value of the bond at expiration, the relationship can be simplified to long call + long bond = put.