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46. A one-dollar increase in a stock's price would result in __________ in the call option's value
of __________ than one dollar.
47. A hedge ratio of .70 implies that a hedged portfolio should consist of ________.
48. If a stock price increases, the price of a put option on the stock will __________ and the
price of a call option on the stock will __________.
49. The current stock price of Alcoa is $70, and the stock does not pay dividends. The
instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa's stock
is 40%. You want to purchase a call option on this stock with an exercise price of $75 and an
expiration date 30 days from now. Based on the Black-Scholes OPM, the call option's delta will be
__________.
50. The current stock price of Alcoa is $70, and the stock does not pay dividends. The
instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa'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.
51. The current stock price of International Paper is $69, and the stock does not pay
dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard
deviation of International 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.
52. The current stock price of International Paper is $69, and the stock does not pay
dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard
deviation of International 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 put option should be worth __________ today.
53. The current stock price of Johnson & Johnson is $64, and the stock does not pay
dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation
of J&J'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.
54. The current stock price of Johnson & Johnson is $64, and the stock does not pay
dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation
of J&J'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 put option should be worth __________ today.
55. The stock price of Ajax 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.
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.
57. If you have an extremely "bullish" outlook on the stock market, you could attempt to
maximize your rate of return by ________________.
58. Which one of the following will increase the value of a put option?
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
____________________________.
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 _______________.
61. According to the put-call parity theorem, the payoffs associated with ownership of a call
option can be replicated by __________________.
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 ____________.
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.
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 $.95 today. A call option on Harper Corp. stock with an
exercise price of $30 and the same expiration date should be worth __________ today.
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.
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?
