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50) The current stock price of Alcoco is $70, and the stock does not pay dividends. The
instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's
stock is 40%. You want to purchase a put option on this stock with an exercise price of $75 and
an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold
________ shares of stock per 100 put options to hedge your risk.
A) 30
B) 34
C) 69
D) 74
51) The current stock price of National Paper is $69, and the stock does not pay dividends. The
instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National
Paper's stock is 25%. You want to purchase a call option on this stock with an exercise price of
$70 and an expiration date 73 days from now.
Using the Black-Scholes OPM, the call option should be worth ________ today.
A) $2.50
B) $2.94
C) $3.26
D) $3.50
52) The current stock price of National Paper is $69, and the stock does not pay dividends. The
instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National
Paper's stock is 25%. You want to purchase a put option on this stock with an exercise price of
$70 and an expiration date 73 days from now.
Using the Black-Scholes, the put option should be worth ________ today.
A) $1.50
B) $2.88
C) $2.55
D) $3.00
53) The current stock price of Howard & Howard is $64, and the stock does not pay dividends.
The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's
stock is 20%. You want to purchase a call option on this stock with an exercise price of $55 and
an expiration date 73 days from now.
Using the Black-Scholes OPM, the call option should be worth ________ today.
A) $0.01
B) $0.08
C) $9.26
D) $9.62
54) The current stock price of Howard & Howard is $64, and the stock does not pay dividends.
The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's
stock is 20%. You want to purchase a put option on this stock with an exercise price of $55 and
an expiration date 73 days from now.
Using Black-Scholes, the put option should be worth ________ today.
A) $0.01
B) $0.07
C) $9.26
D) $9.62
55) The stock price of Apax Inc. is currently $105. The stock price a year from now will be
either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is
10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an
expiration date 1 year from now should be worth ________ today.
A) $11.59
B) $15
C) $20
D) $40
56) The stock price of Bravo Corp. is currently $100. The stock price a year from now will be
either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless
assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135
and an expiration date 1 year from now should be worth ________ today.
A) $34.09
B) $37.50
C) $38.21
D) $45.45
57) If you have an extremely "bullish" outlook on the stock market, you could attempt to
maximize your rate of return by ________.
A) purchasing out-of-the-money call options
B) purchasing at-the-money bull spreads
C) purchasing in-the-money call options
D) purchasing at-the-money call options
58) Which one of the following will increase the value of a put option?
A) a decrease in the exercise price
B) a decrease in time to expiration of the put
C) an increase in the volatility of the underlying stock
D) an increase in stock price
59) You find the option prices for three June call options on the same stock. The 95 call has an
implied volatility of 25%, the 100 call has an implied volatility of 25%, and the 105 call has an
implied volatility of 30%. If you believe this represents a mispricing situation. you may want to
________.
A) buy the 105 call and write the 100 call
B) buy the 105 call and write the 95 call
C) buy either the 95 or the 100 call and write the 105 call
D) write the 105 call and write either the 95 or the 100 call
60) You are considering purchasing a call option with a strike price of $35. The price of the
underlying stock is currently $27. Without any further information, you would expect the hedge
ratio for this option to be ________.
A) negative and near 0
B) negative and near −1
C) positive and near 0
D) positive and near 1
61) According to the put-call parity theorem, the payoffs associated with ownership of a call
option can be replicated by ________.
A) shorting the underlying stock, borrowing the present value of the exercise price, and writing a
put on the same underlying stock and with the same exercise price
B) buying the underlying stock, borrowing the present value of the exercise price, and buying a
put on the same underlying stock and with the same exercise price
C) buying the underlying stock, borrowing the present value of the exercise price, and writing a
put on the same underlying stock and with the same exercise price
D) shorting the underlying stock, lending the present value of the exercise price, and buying a
put on the same underlying stock and with the same exercise price
62) You are considering purchasing a put option on a stock with a current price of $33. The
exercise price is $35, and the price of the corresponding call option is $2.25. According to the
put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until
expiration, the value of the put should be ________.
A) $2.25
B) $3.91
C) $4.05
D) $5.52
63) The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and
Atlantis Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of
$40 and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp.
stock with an exercise price of $40 and an expiration date 6 months from now should be worth
________ today.
A) $0.05
B) $0.14
C) $2
D) $3.95
64) The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper
Corp. pays no dividends. A put option on Harper Corp. stock with an exercise price of $30 and
an expiration date 73 days from now is worth $0.95 today. A call option on Harper Corp. stock
with an exercise price of $30 and the same expiration date should be worth ________ today.
A) $2.25
B) $3.14
C) $3.99
D) $4.31
65) A call option on Juniper Corp. stock with an exercise price of $75 and an expiration date 1
year from now is worth $3 today. A put option on Juniper Corp. stock with an exercise price of
$75 and an expiration date 1 year from now is worth $2.50 today. The risk-free rate of return is
8%, and Juniper Corp. pays no dividends. The stock should be worth ________ today.
A) $69.73
B) $71.69
C) $73.12
D) $77.25
66) You would like to hold a protective put position on the stock of Avalon Corporation to lock
in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next
year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%.
Unfortunately, no put options are traded on Avalon Co.
Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the
option?
A) −1
B) −0.5
C) 0.5
D) 1
67) You would like to hold a protective put position on the stock of Avalon Corporation to lock
in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next
year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%.
Unfortunately, no put options are traded on Avalon Co.
Suppose the desired put options with X = 50 were traded. How much would it cost to purchase?
A) $1.19
B) $2.38
C) $5
D) $3.33
68) You would like to hold a protective put position on the stock of Avalon Corporation to lock
in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next
year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%.
Unfortunately, no put options are traded on Avalon Co.
What would have been the cost of a protective put portfolio?
A) $48.81
B) $51.19
C) $52.38
D) $53.38
