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Fundamentals of Investments, 8e (Jordan)
Chapter 16 Option Valuation
1) Which one of the following terms is used as a shortcut means of saying "time to maturity"?
A) holder
B) expiry
C) timing
D) elapsing
E) dating
2) Delta measures the dollar impact of a change in which one of the following on the value of a
stock option?
A) volatility of the underlying stock price
B) risk-free interest rate
C) underlying stock price
D) option strike price
E) time to maturity
3) Which one of the following is defined as an estimate of stock price volatility obtained from an
option price?
A) calculated alpha
B) estimated variance
C) implied theta
D) VIX
E) implied standard deviation
4) Which one of the following is another term for implied volatility?
A) implied delta
B) implied standard deviation
C) implied alpha
D) implied beta
E) implied gamma
5) VIX represents the volatility index on which one of the following?
A) Wilshire 3000 index
B) DJIA
C) S&P 500 index
D) Dow Jones Transportation average
E) NASDAQ 100
6) Employee stock options grant an employee which one of the following rights?
A) right to sell shares in an S&P 500 index fund
B) right to buy shares in an S&P 500 index fund
C) right to sell shares of the employer's stock
D) right to buy shares of the employer's stock
E) right to buy shares in the employer's retirement plan
7) You know that a call will finish in-the-money. Based on that single piece of information, you
also know which one of the following?
A) The stock price will equal the strike price at expiration.
B) The risk-free rate is zero percent.
C) A put on the same underlying asset with the same strike and expiration will finish out-of-the-
money.
D) The strike price will exceed the stock price at expiration.
E) The price of the call is equal to the price of the put.
8) Which one of the following statements is correct concerning the Black-Scholes option pricing
model?
A) The model assumes a stock pays a constant annual dividend.
B) The model expresses time in terms of years.
C) The model is based on American-style options.
D) The model assumes that the current stock price is equal to the strike price.
E) The model assumes the put is in-the-money.
9) Which one of the following variables is NOT included in the Black-Scholes option pricing
model?
A) strike price
B) time remaining until option expiration
C) stock volatility as measured by standard deviation
D) stock price
E) market rate of return
10) Which two of the following have the greatest effect on stock option prices?
I. volatility of underlying stock price
II. time to option maturity
III. underlying stock price
IV. option strike price
A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
E) III and IV only
11) An increase in which two of the following will have a negative effect on the value of a put
option?
I. risk-free interest rate
II. time to option maturity
III. underlying stock price
IV. option strike price
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only
12) An increase in which one of the following will have a negative effect on the price of a call
option?
A) option strike price
B) time remaining to option expiration
C) underlying stock price
D) volatility of the underlying stock price
E) risk-free interest rate
13) Which one of the following best describes the graphical relationship between stock prices
and option prices?
A) linearity
B) concavity
C) convexity
D) hyperbolic
E) exponential
14) Which of the following will result from a decrease in an option's strike price?
I. increase in call option price
II. decrease in call option price
III. increase in put option price
IV. decrease in put option price
A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
15) Which one of the following statements concerning the relationship between time to option
maturity and call and put prices is correct?
A) Put and call prices increase at the same rate as the time to option maturity increases.
B) Put prices and time to maturity are inversely related.
C) Call prices tend to increase faster than put prices as the time to option maturity increases.
D) Put prices increase while call prices remain constant as the time to option maturity increases.
E) Call prices are inversely related to time to maturity.
16) Which one of the following statements concerning the relationship between the volatility of
the underlying stock price, as measured by sigma (σ), and call and put prices is correct?
A) Call and put prices react fairly similarly in response to changes in sigma.
B) Call prices increase and put prices decrease as sigma increases.
C) Put price increase and call prices decrease as sigma increases.
D) Call prices increase and put prices remain relatively constant and sigma increases.
E) Neither put nor call prices are affected by changes in sigma.
17) Which option price(s) will increase when the interest rate increases?
A) both the call and put
B) call only
C) put only
D) neither the call nor the put
E) Answer cannot be determined from the information provided.
18) Which option price(s) will increase when the dividend yield increases?
A) both the call and put
B) call only
C) put only
D) neither the call nor the put
E) Answer cannot be determined from the information provided.
19) Which one of the following statements concerning option prices is correct?
A) There is a relatively linear direct relationship between the volatility of the underlying stock
price and option prices.
B) Call option prices decrease and put option prices increase as the time to expiration increases.
C) Put option prices are directly related to the price of the underlying stock.
D) The relationship between option prices and stock prices is a linear relationship.
E) Delta measures the effect that the underlying stock's dividend yield has on option prices.
20) Which one of the following situations will produce the highest call price, all else constant?
A) $29 stock price; $30 strike price
B) $41 stock price; $40 strike price
C) $20 stock price; $20 strike price
D) $34 stock price; $35 strike price
E) $24 stock price; $25 strike price
21) Which one of the following situations will produce the highest call price, all else constant?
Assume the options are all in-the-money.
A) $20 strike price; 45 days to option expiration
B) $20 strike price; 60 days to option expiration
C) $25 strike price; 45 days to option expiration
D) $25 strike price; 60 days to option expiration
E) Insufficient information is provided to answer this question.
22) All else constant, which one of the following situations will produce the highest call price
given a strike price of $25?
A) $30 stock price; 40 days to option expiration
B) $30 stock price; 60 days to option expiration
C) $35 stock price; 40 days to option expiration
D) $35 stock price; 60 days to option expiration
E) Insufficient information is provided to answer this question.
23) All else constant, which one of the following situations will produce the highest call price
given a strike price of $27.50?
A) $25 stock price; 15 percent standard deviation
B) $25 stock price; 30 percent standard deviation
C) $30 stock price; 15 percent standard deviation
D) $30 stock price; 30 percent standard deviation
E) Insufficient information is provided to answer this question.
24) Which one of the following situations will produce the highest put price, all else constant?
Assume the options are all in-the-money.
A) $15 strike price; 45 days to option expiration
B) $15 strike price; 60 days to option expiration
C) $20 strike price; 45 days to option expiration
D) $20 strike price; 60 days to option expiration
E) Insufficient information is provided to answer this question.
25) Which one of the following situations will produce the highest put price, all else constant?
Assume the options are all in-the-money.
A) $50 stock price; 60 days to option expiration
B) $50 stock price; 90 days to option expiration
C) $55 stock price; 60 days to option expiration
D) $55 stock price; 90 days to option expiration
E) Insufficient information is provided to answer this question.
26) Which one of the following situations will produce the highest put price, all else constant?
Assume the options are all in-the-money.
A) $30 stock price; 20 percent standard deviation
B) $30 stock price; 25 percent standard deviation
C) $35 stock price; 20 percent standard deviation
D) $35 stock price; 25 percent standard deviation
E) Insufficient information is provided to answer this question.
27) Which one of the following statements is correct?
A) Both call and put option deltas are always positive.
B) Put option deltas are always positive.
C) Call option deltas are always positive.
D) Both call and put option deltas are always negative.
E) All deltas can be positive, negative, or equal to zero.
28) A 6-month call option on ABC stock is priced at $2.80. The call option delta is 0.66. How
will the approximate call option price be computed if the underlying stock price increases by $1?
A) $2.80
B) $2.80 - $0.66
C) $2.80 + $0.66
D) $2.80 × 0.66
E) $2.80 × (1 + 0.66)
29) You own shares of AZT stock. Which of the following strategies can you use to hedge your
risk associated with a price decrease in AZT stock?
I. buy call options
II. write call options
III. buy put options
IV. write put options
A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
30) Stock prices and call option prices are:
A) unrelated.
B) negatively correlated.
C) directly related.
D) perfectly related.
E) inversely related.
31) Which two of the following are key to making SPX options an easy choice as a hedge against
an equity portfolio?
I. European style
II. American style
III. trade in whole or partial contracts
IV. cash settlement
A) III only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
32) Which one of the following inputs for the Black-Scholes model is NOT directly observable?
A) time to option maturity
B) risk-free interest rate
C) stock price
D) strike price
E) stock price volatility
33) The VIX is a measure of which one of the following?
A) changes in the daily trading volume of the NASDAQ 100
B) investor expectations of future market volatility of the S&P 500
C) minute-by-minute changes in the value of the NASDAQ 100
D) number of option contracts outstanding on the S&P 500
E) the opening and closing historical values of the S&P 500
34) How frequently should you consider rebalancing the options hedge on a large equity
portfolio if you wish to maintain an effective hedge?
A) weekly
B) annually
C) just prior to the fiscal year end
D) at option expiration
E) only when the options are in-the-money
35) The S&P 500 volatility index is the ________ while the NASDAQ 100 volatility index is the
________.
A) VIX; VXO
B) VIX; VXN
C) VXO; VIX
D) VXO; VXN
E) VXN; VIX
36) An employee stock option is which one of the following?
A) call option
B) covered call
C) put option
D) protective put
E) index option
37) Which of the following are typical characteristics of employee stock options?
I. originally issued with 10-year life
II. right to purchase stock at a designated price
III. exchange-traded
IV. vesting period
A) II only
B) I and II only
C) I and III only
D) I, II, and IV only
E) I, II, III, and IV
38) Which two of the following are the key reasons why most major corporations issue employee
stock options?
I. provide an employee benefit in place of a retirement plan
II. no immediate cost to the corporation
III. align management and shareholder interests
IV. replace employer-provided insurance benefits
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only
39) Which of the following statements related to employee stock options (ESO) are generally
correct?
I. ESO vesting encourages long-term employment.
II. Most ESOs are issued at-the-money.
III. ESOs cannot be resold.
IV. ESOs that are in-the-money are frequently repriced.
A) I and II only
B) I and IV only
C) II and III only
D) I, II, and III only
E) I, II, III, and IV
40) Which one of the following is an argument against repricing employee stock options?
A) ESO's are originally issued with positive intrinsic value so there's no reason to reprice.
B) Employees have more incentive when options are "under-water".
C) Repricing is a reward for failure.
D) It is unnecessary to reprice as ESOs expire quickly.
E) Repricing affects the market price of the firm's stock for all shareholders.
