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

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

What value does the Black-Scholes-Merton model predict for the call? (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

a. 5.35
b. 1.10
c. 4.73
d. 6.50
e. none of the above

Answer: C

If we now assume that the stock pays a dividend at a known constant rate of 3.5 percent, what stock price should we use in the model? (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

a. 22.60
b. 19.65
c. 23.00
d. 21.99
e. none of the above


Answer: A 

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 above




Answer: E

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 exercise prices
b. the implied volatility equals the historical volatility if the option is correctly priced
c. the implied volatility is determined by trial and error
d. the implied volatility is nearly linearly related to the option price
e. none of the above




Answer: B

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. theta
e. sigma





Answer: C

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. it is given by N(d1) in the Black-Scholes-Merton model
d. it changes slowly near expiration if the option is at-the-money
e. none of the above



Answer: D

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 binomial model
c. it is a continuous time model
d. it gives the price of a European option
e. none of the above





Answer: A

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 is large
b. when the option is at-the-money
c. when the option is in-the-money
d. when the option is out-of-the-money
e. none of the above





Answer: A

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 rate
c. the stock price
d. the time to expiration
e. the exercise price





Answer: A

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 follows a normal distribution
c. there are no transaction costs
d. there are no taxes
e. none of the above




Answer: B

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 stock price plays a role in the model
c. the risk-free rate is continuously compounded
d. the model is consistent with put-call parity
e. none of the above





Answer: B

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 implied volatility
d. the skew
e. none of the above

Answer: B

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. theta
e. none of the above






Answer: C

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 are too small for a delta hedge to work
d. there is no true risk-free rate
e. none of the above






Answer: B

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 linear with respect to the risk-free rate
b. a call price is highly sensitive to the risk-free rate
c. the risk-free rate affects a call but not a put
d. the risk-free rate does not affect a call price
e. none of the above



Answer: A

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, the implied volatility will be

a. higher than 0.28
b. lower than 0.28
c. 0.28
d. lower than the risk-free rate
e. none of the above

Answer: A