Q&A Hero

Q: Which of the following portfolio construction methods starts with security analysis? A. Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

Q: Security selection refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. top-down analysis.

Q: Asset allocation refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. bottom-up analysis.

Q: The Sarbanes-Oxley Act A. requires corporations to have more independent directors. B. requires the firm's CFO to personally vouch for the firm's accounting statements. C. prohibits auditing firms from providing other services to clients. D. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E. All of the above.

Q: During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to I) manipulation of financial data to misrepresent the actual condition of the firm. II) misleading and overly optimistic research reports produced by analysts. III) allocating IPOs to executives as a quid pro quo for personal favors. IV) greenmail. A. II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, and III

Q: Theoretically, takeovers should result in A. improved management. B. increased stock price. C. increased benefits to existing management of the taken-over firm. D. improved management and increased stock price. E. All of the options.

Q: Corporate shareholders are best protected from incompetent management decisions by A. the ability to engage in proxy fights. B. management's control of pecuniary rewards. C. the ability to call shareholder meetings. D. the threat of takeover by other firms. E. one-share/one-vote election rules.

Q: Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensation II) Hiring bickering family members as corporate spies III) Boards of directors forcing out underperforming management IV) Security analysts monitoring the firm closely V) Takeover threats A. II and V B. I, III, and IV C. I, III, IV, and V D. III, IV, and V E. I, III, and V

Q: A disadvantage of using stock options to compensate managers is that A. it encourages managers to undertake projects that will increase stock price. B. it encourages managers to engage in empire building. C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. D. All of the above.

Q: The ____________ refers to the potential conflict between management and shareholders. A. agency problem B. diversification problem C. liquidity problem D. solvency problem E. regulatory problem

Q: Financial assets permit all of the following except A. consumption timing. B. allocation of risk. C. separation of ownership and control. D. elimination of risk.

Q: The intrinsic value of an out-of-the-money call option is equal to A. the call premium. B. zero. C. the stock price minus the exercise price. D. the striking price.

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that A. the call price would increase. B. the call price would decrease. C. the call price would not change. D. the put price would decrease. E. the put price would not change.

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the option has delta of .5, what is its elasticity? A. 4.17 B. 2.32 C. 1.79 D. 0.5 E. 1.5

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call? A. $8 B. $12 C. $0 D. $4 E. Cannot be determined without more information

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call? A. $12 B. $8 C. $0 D. $23

Q: Options sellers who are delta-hedging would most likely A. sell when markets are falling. B. buy when markets are rising. C. sell when markets are falling and buy when markets are rising. D. sell whether markets are falling or rising. E. buy whether markets are falling or rising.

Q: Empirical tests of the Black-Scholes option pricing model A. show that the model generates values fairly close to the prices at which options trade. B. show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls. C. indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. E. All of the options are correct.

Q: Use the two-state put-option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______. A. $0 and $40; −4/7 B. $0 and $50; +4/7 C. $0 and $40; +4/7 D. $0 and $50; −4/7 E. $20 and $40; +1/2

Q: Relative to European puts, otherwise identical American put options A. are less valuable. B. are more valuable. C. are equal in value. D. will always be exercised earlier. E. None of the options are correct.

Q: An American call-option buyer on a nondividend-paying stock will A. always exercise the call as soon as it is in the money. B. only exercise the call when the stock price exceeds the previous high. C. never exercise the call early. D. buy an offsetting put whenever the stock price drops below the strike price. E. None of the options are correct.

Q: Which one of the following variables influences the value of put options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility A. I and IV only B. II and III only C. I, II, and IV only D. I, II, III, and IV E. I, II, and III only

Q: Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility A. I and IV only B. II and III only C. I, II, and IV only D. I, II, III, and IV E. I, II, and III only

Q: A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar. A. increase; more than B. decrease; more than C. decrease; less than D. increase; less than E. increase; exactly

Q: Lower dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to higher dividend-payout policies. A. negative; negative B. positive; positive C. positive; negative D. negative; positive E. zero; zero

Q: Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies. A. negative; negative B. positive; positive C. positive; negative D. negative; positive E. zero; zero

Q: A put option on the S&P 500 Index will best protect a portfolio A. of 100 shares of IBM stock. B. of 50 bonds. C. that corresponds to the S&P 500. D. of 50 shares of AT&T and 50 shares of Xerox stocks. E. that replicates the Dow.

Q: 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? A. 2.76 B. 2.30 C. −7.67 D. −2.76 E. −2.30

Q: 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 A. 0.70. B. 0.30. C. −0.70. D. −0.30. E. −0.17.

Q: 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 A. 0.60. B. 0.40. C. −0.60. D. −0.40. E. −0.17.

Q: 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 A. 0.30. B. 0.50. C. −0.60. D. −0.50. E. −0.17.

Q: 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 A. 0.70. B. 0.30. C. −0.70. D. −0.30. E. −0.17.

Q: 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 $1 decline in the stock price? A. +$700 B. +$500 C. −$580 D. −$520

Q: 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 $1 decline in the stock price? A. −$345 B. +$500 C. −$580 D. −$520

Q: 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 $1 decline in the stock price? A. +$700 B. −$850 C. −$580 D. −$520

Q: 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 $1 decline in the stock price? A. +$700 B. +$500 C. −$1,150 D. −$520

Q: 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? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases, and portfolio B if it decreases E. Portfolio B if the stock price increases, and portfolio A if it decreases

Q: 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? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: 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? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: 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? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: Volatility risk is A. the volatility level for the stock that the option price implies. B. the risk incurred from unpredictable changes in volatility. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: Dynamic hedging is A. the volatility level for the stock that the option price implies. B. the continued updating of the hedge ratio as time passes. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: Delta neutral A. is the volatility level for the stock that the option price implies. B. is the continued updating of the hedge ratio as time passes. C. is the percentage change in the stock call-option price divided by the percentage change in the stock price. D. means the portfolio has no tendency to change value as the underlying portfolio value changes.

Q: The gamma of an option is A. the volatility level for the stock that the option price implies. B. the continued updating of the hedge ratio as time passes. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: Which of the inputs in the Black-Scholes option pricing model are directly observable? A. The price of the underlying security B. The risk-free rate of interest C. The time to expiration D. The variance of returns of the underlying asset return E. The price of the underlying security, risk-free rate of interest, and time to expiration

Q: 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. D. the variance of returns of the underlying asset return.

Q: The price of a stock call option is __________ correlated with the stock price and __________ correlated with the strike price. A. positively; positively B. negatively; positively C. negatively; negatively D. positively; negatively E. not; not

Q: The price of a stock put option is __________ correlated with the stock price and __________ correlated with the strike price. A. positively; positively B. negatively; positively C. negatively; negatively D. positively; negatively E. not; not

Q: Other things equal, the price of a stock put option is negatively correlated with which of the following factors? A. The stock price B. The time to expiration C. The stock volatility D. The exercise price E. The time to expiration, stock volatility, and exercise price

Q: Other things equal, the price of a stock put option is positively correlated with which of the following factors? A. The stock price B. The time to expiration C. The stock volatility D. The exercise price E. The time to expiration, stock volatility, and exercise price

Q: Other things equal, the price of a stock put option is positively correlated with the following factors except A. the stock price. B. the time to expiration. C. the stock volatility. D. the exercise price.

Q: Other things equal, the price of a stock call option is negatively correlated with which of the following factors? A. The stock price B. The time to expiration C. The stock volatility D. The exercise price E. The stock price, time to expiration, and stock volatility

Q: Other things equal, the price of a stock call option is positively correlated with which of the following factors? A. The stock price B. The time to expiration C. The stock volatility D. The exercise price E. The stock price, time to expiration, and stock volatility

Q: Other things equal, the price of a stock call option is positively correlated with the following factors except A. the stock price. B. the time to expiration. C. the stock volatility. D. the exercise price.

Q: If the stock price decreases, the price of a put option on that stock __________, and that of a call option __________. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases E. does not change; does not change

Q: The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. All of the options are correct. E. None of the options are correct.

Q: All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. None of the options are correct.

Q: Which of the following factors affect the price of a stock option? A. The risk-free rate B. The riskiness of the stock C. The time to expiration D. The expected rate of return on the stock E. The risk-free rate, riskiness of the stock, and time to expiration

Q: Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call.

Q: You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as A. a vertical spread. B. a straddle. C. a time spread. D. a collar.

Q: You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a money spread. D. a short straddle. E. None of the options are correct.

Q: Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $204. B. decreases to $190. C. increases to $206. D. decreases to $196. E. None of the options are correct.

Q: Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $504. B. decreases to $490. C. increases to $506. D. decreases to $496. E. None of the options are correct.

Q: A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. None of the options are correct.

Q: According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to A. the call value plus the present value of the exercise price plus the stock price. B. the call value plus the present value of the exercise price minus the stock price. C. the present value of the stock price minus the exercise price minus the call price. D. the present value of the stock price plus the exercise price minus the call price. E. None of the options are correct.

Q: A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

Q: The current market price of a share of MSI stock is $24. If a call option on this stock has a strike price of $24, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options are correct.

Q: The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options are correct.

Q: The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

Q: The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of CSCO stock is $21. D. is out of the money and sells for a higher price than if the market price of CSCO stock is $21. E. is in the money and sells for a higher price than if the market price of CSCO stock is $21.

Q: The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70. E. is in the money and sells for a higher price than if the market price of Boeing stock is $70.

Q: The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of AT&T stock is $40. D. is out of the money and sells for a higher price than if the market price of AT&T stock is $40. E. is in the money and sells for a higher price than if the market price of AT&T stock is $40.

Q: All else equal, call option values are higher A. in the month of May. B. for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May and for high dividend-payout policies.

Q: All else equal, call option values are lower A. in the month of May. B. for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May and for high dividend-payout policies.

Q: To adjust for stock splits A. the exercise price of the option is reduced by the factor of the split, and the number of options held is increased by that factor. B. the exercise price of the option is increased by the factor of the split, and the number of options held is reduced by that factor. C. the exercise price of the option is reduced by the factor of the split, and the number of options held is reduced by that factor. D. the exercise price of the option is increased by the factor of the split, and the number of options held is increased by that factor.

Q: A European put option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

Q: A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

Q: Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? A. $17.50 B. $15.26 C. $10.36 D. $12.26 E. None of the options.

Q: Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? A. $4.38 B. $5.60 C. $6.23 D. $12.26 E. None of the options.

Q: Trading in "exotic options" takes place primarily A. on the New York Stock Exchange. B. in the over-the-counter market. C. on the American Stock Exchange. D. in the primary marketplace. E. None of the options.