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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Option Valuation

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	Before expiration the time value of an in the money stock 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.


2	Other things equal, the price of a stock call option is positively correlated with the following factors except
		A)	the exercise price.
		B)	the time to expiration.
		C)	the stock volatility.
		D)	the stock price.
		E)	none of the above.


3	A hedge ratio of 0.60 implies that a hedged portfolio should consist of
		A)	long 0.60 shares for each short stock.
		B)	short 0.60 calls for each long stock.
		C)	long 0.60 calls for each short call.
		D)	long 0.60 shares for each long call.
		E)	none of the above.


4	The dollar change in the value of a stock call option is always
		A)	higher than the dollar change in the value of the stock.
		B)	lower 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 b.


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


6	Relative to European puts, otherwise identical American put options
		A)	are more valuable.
		B)	are less valuable.
		C)	are equal in value.
		D)	will always be exercised earlier.
		E)	none of the above.


7	Which one of the following variables influence the value of options? I) Dividend yield of underlying stock. II) Time to expiration of the option. III) Level of interest rates. IV) Stock price volatility.
		A)	I and IV only.
		B)	II and III only.
		C)	I, II, and IV only.
		D)	I, II, III, and IV.
		E)	I, II and III only.


8	Which of the following models are used to price options?
		A)	Black-Scholes model
		B)	Binomial-Pricing model
		C)	Multinomial-Pricing model
		D)	All of the above
		E)	None of the above


9	If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that
		A)	the call price would increase.
		B)	the call price would not change.
		C)	the call price would not decrease.
		D)	the put price would decrease.
		E)	the put price would not change.


10	In volatile markets, dynamic hedging may be difficult to implement because
		A)	as volatility increases, historical deltas are too low.
		B)	prices move too quickly for effective rebalancing.
		C)	price quotes may be delayed so that correct hedge ratios cannot be computed.
		D)	volatile markets may cause trading halts.
		E)	all of the above.

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