Q&A Hero

Q: Which one of the following inputs is included in the Black-Scholes-Merton model but not in the Black-Scholes model? A. stock price volatility B. time to option maturity C. risk-free interest rate D. underlying stock price E. dividend yield

Q: Repricing an employee stock option involves which one of the following? A. stock-split B. stock dividend C. change in option strike price D. change in option expiration date E. change in option premium

Q: Which one of the following is an argument against repricing employee stock options? A. ESO's are originally issued with positive intrinsic value so there's no reason to reprice. B. Employees have more incentive when options are "under-water". C. Repricing is a reward for failure. D. It is unnecessary to reprice as ESOs expire quickly. E. Repricing affects the market price of the firm's stock for all shareholders.

Q: Which of the following statements related to employee stock options (ESO) are generally correct? I. ESO vesting encourages long-term employment. II. Most ESOs are issued at-the-money. III. ESOs cannot be resold. IV. ESOs that are in-the-money are frequently repriced. A. I and II only B. I and IV only C. II and III only D. I, II, and III only E. I, II, III, and IV

Q: 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 A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only

Q: 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 A. II only B. I and II only C. I and III only D. I, II, and IV only E. I, II, III, and IV

Q: An employee stock option is which one of the following? A. call option B. covered call C. put option D. protective put E. index option

Q: The S&P 500 volatility index is the _____ while the NASDAQ 100 volatility index is the _____. A. VIX; VXO B. VIX; VXN C. VXO; VIX D. VXO; VXN E. VXN; VIX

Q: How frequently should you consider rebalancing the options hedge on a large equity portfolio if you wish to maintain an effective hedge? A. weekly B. annually C. just prior to the fiscal year end D. at option expiration E. only when the options are in-the-money

Q: The VIX is a measure of which one of the following? A. changes in the daily trading volume of the NASDAQ 100 B. investor expectations of future market volatility of the S&P 500 C. minute-by-minute changes in the value of the NASDAQ 100 D. number of option contracts outstanding on the S&P 500 E. the opening and closing historical values of the S&P 500

Q: Which one of the following inputs for the Black-Scholes model is NOT directly observable? A. time to option maturity B. risk-free interest rate C. stock price D. strike price E. stock price volatility

Q: 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 A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only

Q: Stock prices and call option prices are: A. unrelated. B. negatively correlated. C. directly related. D. perfectly related. E. inversely related.

Q: You own shares of AZT stock. Which of the following strategies can you use to hedge your risk associated with a price decrease in AZT stock? I. buy call options II. write call options III. buy put options IV. write put options A. I only B. I and III only C. I and IV only D. II and III only E. II and IV only

Q: A 6-month call option on ABC stock is priced at $3.60. The call option delta is 0.76. How will the approximate call option price be computed if the underlying stock price increases by $1? A. $3.60 B. $3.60 - $0.76 C. $3.60 + $0.76 D. $3.60 .76 E. $3.60 (1 + .76)

Q: Which one of the following statements is correct?A. Both call and put option deltas are always positive.B. Put option deltas are always positive.C. Call option deltas are always positive.D. Both call and put option deltas are always negative.E. All deltas can be positive, negative, or equal to zero.

Q: 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.

Q: Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in-the-money. A. $50 stock price; 60 days to option expiration B. $50 stock price; 90 days to option expiration C. $55 stock price; 60 days to option expiration D. $55 stock price; 90 days to option expiration E. Insufficient information is provided to answer this question.

Q: Which one of the following situations will produce the highest put price, all else constant? Assume the options are all in-the-money. A. $15 strike price; 45 days to option expiration B. $15 strike price; 60 days to option expiration C. $20 strike price; 45 days to option expiration D. $20 strike price; 60 days to option expiration E. Insufficient information is provided to answer this question.

Q: All else constant, which one of the following situations will produce the highest call price given a strike price of $27.50? A. $25 stock price; 15 percent standard deviation B. $25 stock price; 30 percent standard deviation C. $30 stock price; 15 percent standard deviation D. $30 stock price; 30 percent standard deviation E. Insufficient information is provided to answer this question.

Q: All else constant, which one of the following situations will produce the highest call price given a strike price of $25? A. $30 stock price; 40 days to option expiration B. $30 stock price; 60 days to option expiration C. $35 stock price; 40 days to option expiration D. $35 stock price; 60 days to option expiration E. Insufficient information is provided to answer this question.

Q: Which one of the following situations will produce the highest call price, all else constant? Assume the options are all in-the-money. A. $20 strike price; 45 days to option expiration B. $20 strike price; 60 days to option expiration C. $25 strike price; 45 days to option expiration D. $25 strike price; 60 days to option expiration E. Insufficient information is provided to answer this question.

Q: Which one of the following situations will produce the highest call price, all else constant? A. $29 stock price; $30 strike price B. $41 stock price; $40 strike price C. $20 stock price; $20 strike price D. $34 stock price; $35 strike price E. $24 stock price; $25 strike price

Q: Which one of the following statements concerning option prices is correct? A. There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices. B. Call option prices decrease and put option prices increase as the time to expiration increases. C. Put option prices are directly related to the price of the underlying stock. D. The relationship between option prices and stock prices is a linear relationship. E. Delta measures the effect that the underlying stock's dividend yield has on option prices.

Q: Which option price(s) will increase when the dividend yield increases? A. both the call and put B. call only C. put only D. neither the call nor the put E. Answer cannot be determined from the information provided.

Q: Which option price(s) will increase when the interest rate increases? A. both the call and put B. call only C. put only D. neither the call nor the put E. Answer cannot be determined from the information provided.

Q: Which one of the following statements concerning the relationship between the volatility of the underlying stock price, as measured by sigma, and call and put prices is correct? A. Call and put prices react fairly similarly in response to changes in sigma. B. Call prices increase and put prices decrease as sigma increases. C. Put price increase and call prices decrease as sigma increases. D. Call prices increase and put prices remain relatively constant and sigma increases. E. Neither put nor call prices are affected by changes in sigma.

Q: Which one of the following statements concerning the relationship between time to option maturity and call and put prices is correct? A. Put and call prices increase at the same rate as the time to option maturity increases. B. Put prices and time to maturity are inversely related. C. Call prices tend to increase faster than put prices as the time to option maturity increases. D. Put prices increase while call prices remain constant as the time to option maturity increases. E. Call prices are inversely related to time to maturity.

Q: Which of the following will result from a decrease in an option's strike price? I. increase in call option price II. decrease in call option price III. increase in put option price IV. decrease in put option price A. I only B. I and III only C. I and IV only D. II and III only E. II and IV only

Q: Which one of the following best describes the graphical relationship between stock prices and option prices? A. linearity B. concavity C. convexity D. hyperbolic E. exponential

Q: An increase in which one of the following will have a negative effect on the price of a call option? A. option strike price B. time remaining to option expiration C. underlying stock price D. volatility of the underlying stock price E. risk-free interest rate

Q: An increase in which two of the following will have a negative effect on the value of a put option? I. risk-free interest rate II. time to option maturity III. underlying stock price IV. option strike price A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only

Q: Which two of the following have the greatest effect on stock option prices? I. volatility of underlying stock price II. time to option maturity III. underlying stock price IV. option strike price A. I and II only B. I and IV only C. II and III only D. II and IV only E. III and IV only

Q: Which one of the following variables is NOT included in the Black-Scholes option pricing model? A. strike price B. time remaining until option expiration C. stock volatility as measured by standard deviation D. stock price E. market rate of return

Q: Which one of the following statements is correct concerning the Black-Scholes option pricing model?A. The model assumes a stock pays a constant annual dividend.B. The model expresses time in terms of years.C. The model is based on American-style options.D. The model assumes that the current stock price is equal to the strike price.E. The model assumes the put is in-the-money.

Q: You know that a call will finish in-the-money. Based on that single piece of information, you also know which one of the following? A. The stock price will equal the strike price at expiration. B. The risk-free rate is zero percent. C. A put on the same underlying asset with the same strike and expiration will finish out-of-the-money. D. The strike price will exceed the stock price at expiration. E. The price of the call is equal to the price of the put.

Q: Employee stock options grant an employee which one of the following rights? A. right to sell shares in an S&P 500 index fund B. right to buy shares in an S&P 500 index fund C. right to sell shares of the employer's stock D. right to buy shares of the employer's stock E. right to buy shares in the employer's retirement plan

Q: VIX represents the volatility index on which one of the following? A. Wilshire 3000 index B. DJIA C. S&P 500 index D. Dow Jones Transportation average E. NASDAQ 100

Q: Which one of the following is another term for implied volatility? A. implied delta B. implied standard deviation C. implied alpha D. implied beta E. implied gamma

Q: 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

Q: Delta measures the dollar impact of a change in which one of the following on the value of a stock option? A. volatility of the underlying stock price B. risk-free interest rate C. underlying stock price D. option strike price E. time to maturity

Q: Which one of the following terms is used as a shortcut means of saying "time to maturity"? A. holder B. expiry C. timing D. elapsing E. dating

Q: Explain how options can be used to manage risk. Provide an example using a call option and another example using a put option.

Q: SLK stock is selling for $28 a share. A $30 call on this stock is priced at $2. What is your maximum profit and maximum loss if you buy the stock and write the call? How does this compare to your maximum profit and loss if you write the call but do not purchase the stock?

Q: You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.

Q: A call option has a premium of $0.60, a strike price of $40, and 3 months to expiration. The current stock price is $39.60. The stock will pay a $0.80 dividend two months from now. The risk-free rate is 3 percent. What is the premium on a 3-month put with a strike price of $40? Assume the options are European style. A. $0.25 B. $0.51 C. $0.78 D. $1.23 E. $1.50

Q: A call option has a premium of $2.80, a strike price of $55, and 3 months to expiration. The current stock price is $52.20. The stock will pay a $1.25 dividend in one month. The risk-free rate is 2.5 percent. What is the premium on a 3-month put with a strike price of $55? Assume the options are European style. A. $2.08 B. $2.15 C. $3.32 D. $4.12 E. $6.51

Q: A call option with 1 month to expiration currently sells for $0.70. A put option with the same expiration sells for $1.10. The options are European style. The risk-free rate is 3 percent and the strike price of both options is $18.00. What is the current stock price? A. $16.87 B. $17.06 C. $17.29 D. $17.56 E. $17.86

Q: A call option with 6 months to expiration currently sells for $2.05. A put option with the same expiration sells for $0.60. The options are European style. The risk-free rate is 3.0 percent and the strike price of both options is $50. What is the current stock price? A. $47.89 B. $49.19 C. $50.72 D. $51.29 E. $52.08

Q: A stock is currently selling for $40.85. A 3-month call option with a strike price of $40 has an option premium of $1.30. The risk-free rate is 2 percent and the market rate is 9.5 percent. What is the option premium on a 3-month put with a $40 strike price? Assume the options are European style. A. $0.00 B. $0.05 C. $0.15 D. $0.25 E. $0.35

Q: A stock is currently selling for $26.50. A 3-month put option with a strike price of $30 has an option premium of $4.05. The risk-free rate is 2.5 percent and the market rate is 9.75 percent. What is the option premium on a 2-month call with a $30 strike price? Assume the options are European style. A. $0.00 B. $0.33 C. $0.41 D. $0.67 E. $0.73

Q: A 4-month, $25 call option on Teller stock has an option premium of $0.25. The 4-month, $25 put option has an option premium of $0.80. The risk-free rate is 3 percent. The options are European-style. What is the price of Teller stock? A. $24.20 B. $24.53 C. $24.62 D. $25.97 E. $26.08

Q: A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.50. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price? A. $0.00 B. $0.09 C. $0.44 D. $1.48 E. $1.61

Q: A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call? A. $0.00 B. $0.30 C. $0.70 D. $1.00 E. $1.30

Q: A European call has a strike price of $37.50. The underlying stock's price is $38.20. What is the lower price bound of this call? A. $0.00 B. $0.30 C. $0.50 D. $0.70 E. $1.00

Q: A 3-month put has a strike price of $47.50 and an option premium of $1.40. The underlying stock is selling for $46.70 per share. What is the time value of the put? A. $0.00 B. $0.60 C. $0.70 D. $1.20 E. $1.40

Q: A 6-month call has a strike price of $30. The underlying stock is priced at $31.80 and the option premium on the call is $2.40. What is the per share time value of the call? A. $0.00 B. $0.60 C. $1.40 D. $2.80 E. $3.60

Q: A 6-month put has a strike price of $32.50. The underlying stock's price is $31.10. What is intrinsic value of this put? A. $0.00 B. $0.70 C. $1.40 D. $2.10 E. $2.80

Q: A 6-month put has a strike price of $40. The underlying stock's price is $38.25. What is the intrinsic value of this put? A. $0.00 B. $0.90 C. $1.75 D. $2.30 E. $3.60

Q: A 4-month call has a strike price of $20. The current underlying stock price is $21.45. What is the intrinsic value of this call? A. $0.00 B. $0.48 C. $1.45 D. $3.90 E. $4.35

Q: You purchased a put with a strike price of $37.5 and an option premium of $0.45. You simultaneously bought the stock at a price of $36 a share. What is your profit per share on these transactions if the stock price at expiration is $33.50? A. -$1.15 B. -$0.15 C. $0.15 D. $0.75 E. $1.05

Q: You own 100 shares of Deltona stock which is currently worth $43 a share. You just paid an option premium of $0.85 to buy one put contract on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract? A. $40.00 B. $40.85 C. $42.15 D. $43.00 E. $43.85

Q: Rosalita purchased a put option with a strike price of $35. She paid a total of $140 for the contract. What is the break-even stock price? A. $31.40 B. $33.60 C. $38.00 D. $41.60 E. $42.80

Q: You own 4 put option contracts on ALZ stock. The contracts have a $17.50 strike price and you paid an option premium of $0.40. What is the break-even stock price? A. $17.10 B. $17.30 C. $17.50 D. $17.70 E. $17.90

Q: You purchased 5 put option contracts on Mountain Builders stock at an option premium of $0.65. The strike price is $25. What is your break-even stock price? A. $19.90 B. $24.35 C. $25.00 D. $25.75 E. $30.10

Q: Russ paid a total of $75 to purchase 5 call options with a strike price of $17.50. What is the break-even stock price? A. $0.15 B. $0.30 C. $17.35 D. $17.65 E. $32.50

Q: Jeff paid a call premium of $0.60 when he purchased his call option with a strike price of $22.00. What is the break-even stock price? A. $0.00 B. $0.25 C. $22.25 D. $22.60 E. $22.75

Q: Jasmine purchased one call option with a strike price of $35 when the call premium was $1.10. What is the break-even stock price? A. $.00 B. $33.90 C. $34.45 D. $35.00 E. $36.10

Q: You own 6 put option contracts on JL Industrial stock. You paid an option premium of $0.75 for a strike price of $42.50. On the option expiration date, the stock was selling for $41.00 a share. What is your percentage return? A. -100 percent B. -18.75 percent C. 51.26 percent D. 78.75 percent E. 100 percent

Q: Kim Lee purchased 6 put option contracts on Eastern Imports stock at a strike price of $47.50. The option premium was $0.65. At expiration, the stock was valued at $44.90 a share. What is her percentage return? A. -100 percent B. 0 percent C. 5.47 percent D. 32.82 percent E. 300 percent

Q: Gerold purchased 3 put option contracts at an option premium of $0.95 and a strike price of $40. At expiration, the stock price was $42.25 per share. What is his percentage return? A. -100 percent B. 0 percent C. 15.79 percent D. 21.62 percent E. 31.58 percent

Q: Courtney purchased 5 call options with a $47.50 strike price and a call premium of $1.10. On the expiration date, the underlying stock was priced at $50.60 per share. What is her percentage return on this investment? A. -100 percent B. 70.45 percent C. 181.82 percent D. 267.38 percent E. 909.10 percent

Q: You purchased a call option with a $22.50 strike price and a call premium of $0.40. On the expiration date, the underlying stock was priced at $23.40 per share. What is the percentage return on your investment? A. -100 percent B. 0 percent C. 50 percent D. 125 percent E. 200 percent

Q: You purchased 6 call options with a $40 strike price at a total cost of $150. On the expiration date, the underlying stock was priced at $39.20. What is the percentage return on your investment? A. -420 percent B. -100 percent C. 68.75 percent D. 2.02 percent E. 220 percent

Q: You own one SPX put option with a strike of 1,300. What is the payoff at maturity for this option contract if the S&P 500 index is 1,322? A. -$3,600 B. -$36 C. $0 D. $36 E. $3,600

Q: You purchased one SPX put option with a strike of 1,400. You wrote one SPX put option with the same maturity date and a strike of 1,300. At maturity, what is your total payoff if the S&P 500 index is 1,320? A. -$8,000 B. -$2,000 C. $2,000 D. $4,000 E. $8,000

Q: You purchased one SPX call option with a strike of 1,500. You wrote one SPX call option with the same maturity date and a strike of 1,450. At maturity, what is your payoff if the S&P 500 is at 1,475? A. -$2,500 B. -$250 C. $25 D. $250 E. $2,500

Q: You own one SPX call option with a strike of 1,400. What is the payoff at maturity for this option contract if the S&P 500 index is 1,414? A. $0 B. $14 C. $140 D. $1,400 E. $14,000

Q: Tim purchased 5 put option contracts on Western Fields stock. The strike price was $35 and the option premium was $0.55. At expiration, the stock was selling for $35.75. What is the payoff on the option contracts? A. -$60 B. -$30 C. $0 D. $30 E. $60

Q: You purchased 7 put option contracts on Alto Industries. The strike price was $42.50 and the option premium was $1.30. On the expiration date, the stock was valued at $41.40 a share. What is the payoff on the option contracts? A. -$140 B. $0 C. $110 D. $360 E. $770