A synthetic short put position can be created with which of the following sets of transactions.

A synthetic short put position can be created with which of the following sets of transactions. a. borrow the present value of the strike price,...

A synthetic long call position can be created with which of the following sets of transactions.

A synthetic long call position can be created with which of the following sets of transactions. a. borrow the present value of the strike price,...

Identify the correct statement related to the choice of exercise price for buying a call.

Identify the correct statement related to the choice of exercise price for buying a call. a. the higher the exercise price the higher the call premium b....

Which of the following statements about a covered call writing strategy is true?

Which of the following statements about a covered call writing strategy is true? a. the losses are limited b. return and risk are greater than that...

Which of the following investors may be obligated to buy stock?

Which of the following investors may be obligated to buy stock? a. covered call writer b. call buyer c. put writer d. protective put buyer e. none...

The difference in profit from an actual put and a synthetic put is

The difference in profit from an actual put and a synthetic put is a. X b. ST - X c. X - ST d. ST + X(1 + r)-T e. none of the above Answer:...

Which of the following is the breakeven for a protective put?

Which of the following is the breakeven for a protective put? a. X + S0 - P b. P + S0 c. X - ST d. X - S0 - P e. none of the above Answer:...

Which of the following strategies has essentially the same profit diagram as a covered call?

Which of the following strategies has essentially the same profit diagram as a covered call? a. a long put b. a short put c. a protective put d....

Which of the following strategies has the greatest potential loss?

Which of the following strategies has the greatest potential loss? a. an uncovered call b. a long put c. a covered call d. a long position in the...

Each of the following is a bullish strategy except

Each of the following is a bullish strategy except a. a long call b. a short put c. a short stock d. a protective put e. none of the above Answer:...

Early exercise imposes a risk to all but one of the following transactions.

Early exercise imposes a risk to all but one of the following transactions. a. a short call b. a short put c. a protective put d. an uncovered call e....

Which of the following is equivalent to a synthetic call?

Which of the following is equivalent to a synthetic call? a. a long stock and a short put position b. a long put and a long stock position c. a long...

Which of the following transactions does not profit in a strong bull market.

Which of the following transactions does not profit in a strong bull market. a. a short put b. a covered call c. a protective put d. a synthetic...

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration? a. the profit...

Consider two put options differing only by exercise price. The one with the higher exercise price has

Consider two put options differing only by exercise price. The one with the higher exercise price has a. the lower breakeven and lower profit potential b....

S0 = 23 X = 20 rc = 0.09 T = 0.5 2 = 0.15 No dividends are expected.

S0 = 23 X = 20rc = 0.09 T = 0.52 = 0.15No dividends are expected. What value does the Black-Scholes-Merton model predict for the call? (Due to differences...

The relationship between the option price and the exercise price is called

The relationship between the option price and the exercise price is called  a. the gamma b. the vega c. the omega d. the zeta e. none of the...

Which of the following statements about the volatility is not true?

Which of the following statements about the volatility is not true?  a. the implied volatility often differs across options with different...

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?

Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?  a. delta b. gamma c. rho d....

Which of the following statements about the delta is not true?

Which of the following statements about the delta is not true?  a. it ranges from zero to one b. it converges to zero or one at expiration c....

Which of the following characteristics of the Black-Scholes-Merton model is not correct?

Which of the following characteristics of the Black-Scholes-Merton model is not correct? a. it is a discrete time model b. it is the limit of the...

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions? a. when the number of time periods...

Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?

Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain? a. the volatility b. the risk-free...

Which of the following assumptions of the Black-Scholes-Merton model is not correct?

Which of the following assumptions of the Black-Scholes-Merton model is not correct?  a. the stock volatility is constant b. the stock return...

Which of the following statements about the Black-Scholes-Merton model is not true?

Which of the following statements about the Black-Scholes-Merton model is not true? a. decreasing the volatility lowers the call price b. the expected...

The pattern of volatility across exercise prices is often called

The pattern of volatility across exercise prices is often called a. the price-fluctuation graph b. the volatility smile c. the term structure of...

The relationship between the volatility and the time to expiration is called the

The relationship between the volatility and the time to expiration is called the a. volatility smile b. volatility skew c. term structure of volatility d....

What is the reason for executing a gamma hedge?

What is the reason for executing a gamma hedge?  a. the volatility can change b. the stock price can make a large move c. the stock price moves...

Which of the following statements is true about the relationship between the option price and the risk-free rate?

Which of the following statements is true about the relationship between the option price and the risk-free rate?  a. a call price is nearly...

If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be

If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11,...

Pricing a put with the binomial model is the same procedure as pricing with a call, except that the

Pricing a put with the binomial model is the same procedure as pricing with a call, except that the a. underlying stock must not pay dividends b....

Which of the following statements about the binomial model is incorrect?

Which of the following statements about the binomial model is incorrect? a. it converges to the Black-Scholes-Merton model b. it can accommodate...

In a one-period binomial model with Su = 49.5, Sd = 40.5, p = 0.8, r = 0.06, S = 45 and X = 50, what is a European put worth?

In a one-period binomial model with Su = 49.5, Sd = 40.5, p = 0.8, r = 0.06, S = 45 and X = 50, what is a European put worth? a. 2.17 b. 0.50 c....

Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left in an American call's life. What will the option be worth?

Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left in an American call's life. What will the option be worth? a....

In the binomial model, if an option has no chance of expiring out-of-the-money, the hedge ratio will be

In the binomial model, if an option has no chance of expiring out-of-the-money, the hedge ratio will be a. 0.5 b. infinite c. 1 d. 0 e. none of the...

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent....

When the number of time periods in a binomial model is large, what happens to the binomial probability of an up move?

When the number of time periods in a binomial model is large, what happens to the binomial probability of an up move?  a. it approaches 1.0 b....

When the number of time periods in a binomial model is large, a European call option value does what?

When the number of time periods in a binomial model is large, a European call option value does what?  a. fluctuates around its intrinsic value b....

In a non-recombining tree, the number of paths that will occur after three periods is

In a non-recombining tree, the number of paths that will occur after three periods is  a. three b. four c. ten d. eight e. six Answer:...

Which of the following are not path-dependent options when the stock pays a constant dividend yield?

Which of the following are not path-dependent options when the stock pays a constant dividend yield?  a. European calls and European puts b....

If the binomial model is extended to multiple periods for a fixed option life, which of the following adjustments must be made?

If the binomial model is extended to multiple periods for a fixed option life, which of the following adjustments must be made?  a. the up and...

When puts are priced with the binomial model, which of the following is true?

When puts are priced with the binomial model, which of the following is true?  a. the puts must be American b. the puts cannot be properly hedged c....

The values of u and d are which of the following?

The values of u and d are which of the following? a. the return on the stock if it goes up and down, respectively b. the inverse of the ratio of...

In a two-period binomial world, a mispriced call will lead to an arbitrage profit if

In a two-period binomial world, a mispriced call will lead to an arbitrage profit if  a. the proper hedge ratio is maintained over the two...

In a binomial model, if the call price in the market is higher than the call price given by the model, you should

In a binomial model, if the call price in the market is higher than the call price given by the model, you should  a. sell the call and sell...

A portfolio that combines the underlying stock and a short position in an option is called

A portfolio that combines the underlying stock and a short position in an option is called a. a risk arbitrage portfolio b. a hedge portfolio c....

The effect of volatility on a call/put's price is

The effect of volatility on a call/put's price is  a. decreased price due to decreased possible losses b. nominal volatility will not noticeably...

A situation in which early exercise of an American put can be justified is

A situation in which early exercise of an American put can be justified is a. bankruptcy b. merger c. if X exceeds S0 by greater than any transaction...

Suppose that you observe a European option on a currency with an exchange rate of S0 and a foreign risk-free rate of . Which of the following inequalities correctly expresses the lower bound of the call?

Suppose that you observe a European option on a currency with an exchange rate of S0 and a foreign risk-free rate of . Which of the following inequalities...

Which of the following inequalities correctly states the relationship between the difference in the prices of two European calls that differ only by exercise price

Which of the following inequalities correctly states the relationship between the difference in the prices of two European calls that differ only by...

Given a longer-lived American call and a shorter-lived American call with the same terms, the longer-lived call must always be worth

Given a longer-lived American call and a shorter-lived American call with the same terms, the longer-lived call must always be worth  a. at...

Which of the following statements about an American call is not true?

Which of the following statements about an American call is not true? a. Its time value decreases as expiration approaches b. Its maximum value is...

The difference between a Treasury bill's face value and its price is called the

The difference between a Treasury bill's face value and its price is called the a. time value b. discount c. coupon rate d. bid e. none of the above Answer:...

Which of the following is the lowest possible value of an American put on a stock with no dividends?

Which of the following is the lowest possible value of an American put on a stock with no dividends? a. X(1 + r)-T b. X c. Max(0, X(1 + r)-T - S0) d....

Which of the following is the lowest possible value of an American call on a stock with no dividends?

Which of the following is the lowest possible value of an American call on a stock with no dividends? a. Max(0, S0 - X(1 + r)-T) b. S0 c. Max(0,...

The time value of an option is also referred to as the

The time value of an option is also referred to as the a. synthetic value b. strike value c. speculative value d. parity value e. none of the above Answer:...

If there are no dividends on a stock, which of the following statements is correct?

If there are no dividends on a stock, which of the following statements is correct? a. An American call will sell for more than a European call b....

Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the market price of the call to be less than the price given by put-call parity. Ignoring transaction costs, what trades should you do?

Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the...

On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?

On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free...

Another expression for intrinsic value is

Another expression for intrinsic value is a. parity b. parity value c. exercise value d. all of the above e. none of the above Answer:...

What is the lowest possible value of a European put?

What is the lowest possible value of a European put? a. Max(0, X - S0) b. X(1 + r)-T c. Max[0, S0 - X(1 + r)-T] d. Max[0, X(1 + r)-T - S0)] e. none...

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?

Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0,...