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Exam 16: Option Valuation

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Question 1

Multiple Choice

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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.

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Question 2

Multiple Choice

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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

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Question 3

Multiple Choice

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Which one of the following variables is NOT included in the Black-Scholes option pricing model?

Which one of the following statements concerning option prices is correct?

What is the put option premium given the following information?

You own 1,200 shares of Banner Co. stock that is currently priced at $42 a share. Given this price, the option delta for a $40 call option on this stock is .664. How many $40 call options do you need to hedge against a -$1 change in the price of the stock?

Create a stock price tree for three periods for a stock that is currently valued at $10 a share. The up amount per period is 1.15 and the down amount per period is .90. Show all dollar amounts to 3 decimal places.

You have determined that you need -1,698 call options to hedge your stock portfolio. What should you do based on this information?

A stock is currently priced at $26 a share while the $30 put option is priced at $5.22. The put option delta is -.25. What is the approximate put price if the stock increases in value to $27?

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

Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1402. The option delta is .582. How many option contracts must Laura write to effectively hedge her portfolio?

Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct?

Mike was granted stock options on 1,000 shares of his employer's stock. The stock is currently selling for $27.70 a share and has a standard deviation of 36 percent. The option's strike price is $27.50 and the time to maturity is 10 years. What is the value of each option given a risk-free rate of 3 percent? Assume that no dividends are paid.

Delta measures the dollar impact of a change in which one of the following on the value of a stock option?

Which one of the following situations will produce the highest call price, all else constant?

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

What is the put option premium given the following information?

Draw a graph with the option price on the vertical axis and the time to expiration on the horizontal axis. Illustrate how put and call option prices vary as the time to expiration increases.

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

Which option price(s) will increase when the dividend yield increases?