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Online Quiz The Black-Scholes Option Pricing Model

Question 1: Delta is defined as

Correct
Answer:

the change in the value of an option for a dollar change in the price of
the underlying asset.

Question 2: Which one of the following variables influence the value of call options?
I) Level of interest rates.
II) Time to expiration of the option.
III) exercise price.
IV) Stock price volatility.

Correct Answer:

I, II, III, and IV.

Question 3: Prior to expiration

Selected
Answer:

none of the above.

Correct Answer:
Response
Feedback:

the premium of an option is always greater than the intrinsic


value.

Prior to expiration, any option will have a positive time value. Since the
premium is made up of the options intrinsic and time values, the
premium is always greater than the intrinsic value.

Question 4: The Black-Scholes formula assumes that


I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.
Selected Answer:

I, II, III, and IV

Correct Answer:

I, II and IV

Response
Feedback:

The risk-free rate and stock price volatility are assumed to be constant but
the option value does not depend on the expected rate of return on the
stock. The model also assumes that stock prices will not jump markedly.

Question 5: If a stock call option has 0.30 chance of finishing in the money, a put with the
same expiration date and exercise price as the call should have ________ chance of finishing in
the money.

Correct Answer:

0.70

Question 6: An American-style call option with six months to maturity has a strike price of
$35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic
value of the call?

Correct Answer:

$8

Question 7: Other things equal, the price of a stock put option is positively correlated with
the following factors except

Correct Answer:

the stock price.

Question 8: If the stock price increases, the price of a put option on that stock __________ and
that of a call option __________.

Correct Answer:

decreases, increases

Question 9: A normal distribution has the following properties:


I. the number of observations above the mean is equal to that below the mean
II. if x is normally distributed with mean 0 and standard deviation 1, it is well documented that
the probability that x will lie between -1 and 1 is 0.95
III. normal distribution has fat tails

Correct Answer:

I only

Question 10: Given: S0 = $35; X = $29; T = 180 days; r = 0.08 (annual); N(d1) = 0.7300;
N(d2) = 0.6583. The value of the call option is _______.

Correct Answer:

$7.20

Question 3: You purchased a call option for a premium of $4. The call has an exercise price
of $29 and is expiring today. The current stock price is $31. What would be your best course
of action?

Correct
Answer:

Exercise the call because the stock price is greater than the
exercise price.

Question 4: Before expiration, the time value of an in the money call option is always

Selected Answer:

none of the above.

Correct Answer:

positive.

Response
Feedback:

The difference between the actual option price and the intrinsic value
is called the time value of the option. It will always remain positive
before expiration.

Question 10: A call option has an intrinsic value of zero if the option is

Correct Answer:

A and B.

Question 1: All the inputs in the Black-Scholes Option Pricing Model are directly observable
except

Correct Answer:

the variance of returns of the underlying asset return.

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