Chapter 21 – Option Valuation
21-1
Chapter 21
Option Valuation
Multiple Choice Questions
1. Before expiration, the time value of an in the money call option is always
A. equal to zero.
Difficulty: Easy
2. Before expiration, the time value of an in the money put option is always
Difficulty: Easy
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3. Before expiration, the time value of an at the money call option is always
Difficulty: Easy
4. Before expiration, the time value of an at the money put option is always
Difficulty: Easy
5. At expiration, the time value of an in the money call option is always
Difficulty: Easy
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6. At expiration, the time value of an in the money put option is always
Difficulty: Easy
7. At expiration, the time value of an at the money call option is always
Difficulty: Easy
8. At expiration, the time value of an at the money put option is always
Difficulty: Easy
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9. A call option has an intrinsic value of zero if the option is
Difficulty: Easy
10. A put option has an intrinsic value of zero if the option is
Difficulty: Easy
11. Prior to expiration
Difficulty: Moderate
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12. Prior to expiration
A. the intrinsic value of a put option is greater than its actual value.
B. the intrinsic value of a put option is always positive.
Difficulty: Moderate
13. If the stock price increases, the price of a put option on that stock __________ and that of
a call option __________.
Difficulty: Moderate
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14. If the stock price decreases, the price of a put option on that stock __________ and that of
a call option __________.
Difficulty: Moderate
15. Other things equal, the price of a stock call option is positively correlated with the
following factors except
Difficulty: Moderate
16. Other things equal, the price of a stock call option is positively correlated with the
following factors
Difficulty: Moderate
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17. Other things equal, the price of a stock call option is negatively correlated with the
following factors
Difficulty: Moderate
18. Other things equal, the price of a stock put option is positively correlated with the
following factors except
Difficulty: Moderate
19. Other things equal, the price of a stock put option is positively correlated with the
following factors
A. the stock price.
B. the time to expiration.
Difficulty: Moderate
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23. All the inputs in the Black-Scholes Option Pricing Model are directly observable except
A. the price of the underlying security.
B. the risk free rate of interest.
C. the time to expiration.
Difficulty: Moderate
24. Which of the inputs in the Black-Scholes Option Pricing Model are directly observable
Difficulty: Moderate
25. Delta is defined as
Difficulty: Moderate
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26. A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A. long 0.70 calls for each short stock.
B. short 0.70 calls for each long stock.
Difficulty: Moderate
27. A hedge ratio of 0.85 implies that a hedged portfolio should consist of
A. long 0.85 calls for each short stock.
B. short 0.85 calls for each long stock.
Difficulty: Moderate
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28. A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.
Difficulty: Moderate
29. A hedge ratio for a call is always
Difficulty: Moderate
30. A hedge ratio for a put is always
Difficulty: Moderate
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31. The dollar change in the value of a stock call option is always
Difficulty: Moderate
32. The percentage change in the stock call option price divided by the percentage change in
the stock price is called
Difficulty: Moderate
33. The elasticity of an option is
Difficulty: Moderate
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34. The elasticity of a stock call option is always
Difficulty: Moderate
35. The elasticity of a stock put option is always
Difficulty: Moderate
36. The gamma of an option is
Difficulty: Moderate
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37. Delta neutral
Difficulty: Moderate
38. Dynamic hedging is
Difficulty: Moderate
39. Volatility risk is
Difficulty: Moderate
21–15
40. Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists
of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a
change in stock price?
Difficulty: Difficult
41. Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B consists
of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a
change in stock price?
Difficulty: Difficult
42. Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists
of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a
change in stock price?
Difficulty: Difficult
21–16
43. Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists
of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a
change in stock price?
Difficulty: Difficult
44. A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio
for the call is 0.7, what would be the dollar change in the value of the portfolio in response to
a one dollar decline in the stock price?
Difficulty: Difficult
45. A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio
for the call is 0.5. What would be the dollar change in the value of the portfolio in response to
a one dollar decline in the stock price?
Difficulty: Difficult
21–17
46. A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio
for the call is 0.4, what would be the dollar change in the value of the portfolio in response to
a one dollar decline in the stock price?
Difficulty: Difficult
47. A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio
for the call is 0.6, what would be the dollar change in the value of the portfolio in response to
a one dollar decline in the stock price?
Difficulty: Difficult
48. If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration
date and exercise price as the call would be ________.
Difficulty: Difficult
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49. If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration
date and exercise price as the call would be ________.
Difficulty: Difficult
50. If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration
date and exercise price as the call would be _______.
Difficulty: Difficult
51. If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the same expiration
date and exercise price as the call would be _______.
Difficulty: Difficult
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52. A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for
the put is -0.30 and the stock is currently selling for $46, what is the elasticity of the put?
Difficulty: Difficult
53. A put option on the S&P 500 index will best protect ________.
Difficulty: Easy
54. Higher dividend payout policies have a __________ impact on the value of the call and a
__________ impact on the value of the put.
Difficulty: Moderate