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1. If the Black-Scholes formula is solved to find the standard deviation consistent with the
current market call premium, that standard deviation would be called the _______.
2. The __________ is the stock price minus exercise price, or the profit that could be attained
by immediate exercise of an in-the-money call option.
3. The _________ is the difference between the actual call price and the intrinsic value.
4. A call option with several months until expiration has a strike price of $55 when the stock
price is $50. The option has _____ intrinsic value and _____ time value.
5. All else equal, call option values are _____ if the _____ is lower.
6. A __________ is an option valuation model based on the assumption that stock prices can
move to only two values over any short time period.
7. The Black-Scholes option-pricing formula was developed for __________.
8. A put option with several months until expiration has a strike price of $55 when the stock
price is $50. The option has _____ intrinsic value and _____ time value.
9. The hedge ratio is often called the option's _______.
10. A 45 call option on a stock priced at $50 is priced at $6.50. This call has an intrinsic value
of ______ and a time value of _____.
11. A 45 put option on a stock priced at $50 is priced at $3.50. This call has an intrinsic value
of ______ and a time value of _____.
12. Investor A bought a call option that expires in 6 months. Investor B wrote a put option with
a 9-month maturity. All else equal, as the time to expiration approaches, the value of investor A's
position will _______ and the value of investor B's position will _______.
13. Investor A bought a call option, and investor B bought a put option. All else equal, if the
interest rate increases, the value of investor A's position will ______ and the value of investor B's
position will _______.
14. Investor A bought a call option, and investor B bought a put option. All else equal, if the
underlying stock price volatility increases, the value of investor A's position will ______ and the
value of investor B's position will _______.
15. The percentage change in the call option price divided by the percentage change in the
stock price is the __________ of the option.
16. Before expiration, the time value of an out-of-the-money stock option is __________.
17. The intrinsic value of a call option is equal to _______________.
18. The divergence between an option's intrinsic value and its market value is usually greatest
when ___________________.
19. The value of a call option increases with all of the following
except
___________.
20. The value of a put option increases with all of the following
except
___________.
21. Perfect dynamic hedging requires _______________.
22. The delta of an option is __________.
23. If you know that a call option will be profitably exercised, then the Black-Scholes model
price will simplify to _______.
24. Hedge ratios for long calls are always __________.
25. Which of the following is a true statement?
26. A longer time to maturity will unambiguously increase the value of a call option because:
I. The longer maturity time reduces the effect of a dividend on call price.
II. With a longer time to maturity the present value of the exercise price falls.
III. With a longer time to maturity the range of possible stock prices at expiration increases.
27. Strike prices of options are adjusted for ____________ but not for ____________.
28. A high dividend payout will ______ the value of a call option and ______ the value of a put
option.
29. According to the Black-Scholes option-pricing model, two options on the same stock but
with different exercise prices should always have the same _________________.
30. When the returns of an option and stock are perfectly correlated as in a two-state
binomial option model, the hedge ratio must be equal to the ratio of ____________.
31. The Black-Scholes hedge ratio for a long call option is equal to __________.
32. The Black-Scholes hedge ratio for a long put option is equal to __________.
33. In a binomial option model with three subintervals, the probability that the stock price
moves up every possible time is _________.
34. In the Black-Scholes model, if an option is not likely to be exercised, both
N
(
d
1) and
N
(
d
2)
will be close to ______. If the option is definitely likely to be exercised,
N
(
d
1) and
N
(
d
2) will be
close to ______.
35. In the Black-Scholes model, as the stock's price increases, the values of
N
(
d
1) and
N
(
d
2)
will _______ for a call and _______ for a put option.
36. Research suggests that option-pricing models that allow for the possibility of ___________
provide more accurate pricing than does the basic Black-Scholes option-pricing model.
I. early exercise
II. changing expected returns of the stock
III. time varying stock price volatility
37. Research suggests that the performance of the Black-Scholes option-pricing model has
__________________.
38. Research conducted by Rubinstein (1994) suggests that _______________ command a
disproportionately high time value.
39. Of the variables in the Black-Scholes OPM, the __________ is not directly observable.
40. The practice of using options or dynamic hedging strategies to provide protection against
investment losses while maintaining upside potential is called _________.
41. The delta of a put option on a stock is always __________.
42. The price of a stock put option is __________ correlated with the stock price and
__________ correlated with the exercise price.
43. The delta of a call option on a stock is always __________.
44. Hedge ratios for long call positions are __________, and hedge ratios for long put positions
are ____________.
45. A higher-dividend payout policy will have a __________ impact on the value of a put and a
__________ impact on the value of a call.
