Chapter 21 Flashcards by Matt Mitchell

Before expiration, the time value of an in-the-money call option is always

A. equal to zero.

B. positive.

C. negative.

D. equal to the stock price minus the exercise price.

E. None of the options

B. positive

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Before expiration, the time value of an in-the-money put option is always

A. equal to zero.

B. negative.

C. positive.

D. equal to the stock price minus the exercise price.

E. None of the options

C. positive

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Before expiration, the time value of an at-the-money call option is always

A. positive.

B. equal to zero.

C. negative.

D. equal to the stock price minus the exercise price.

E. None of the options

A. positive

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Before expiration, the time value of an at-the-money put option is always

A. equal to zero.

B. equal to the stock price minus the exercise price.

C. negative.

D. positive.

E. None of the options

D. positive

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At expiration, the time value of an in-the-money call option is always

A. equal to zero.

B. positive.

C. negative.

D. equal to the stock price minus the exercise price.

E. None of the options

A. equal to zero

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At expiration, the time value of an in-the-money put option is always

A. equal to zero.

B. negative.

C. positive.

D. equal to the stock price minus the exercise price.

E. None of the options

A. equal to zero

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At expiration, the time value of an at-the-money call option is always

A. positive.

B. equal to zero.

C. negative.

D. equal to the stock price minus the exercise price.

B. equal to zero

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At expiration, the time value of an at-the-money put option is always

A. equal to zero.

B. equal to the stock price minus the exercise price.

C. negative.

D. positive.

B. equal to zero

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A call option has an intrinsic value of zero if the option is

A. at the money.

B. out of the money.

C. in the money.

D. at the money and in the money.

E. at the money and out of the money.

E. at the money and out of the money

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A put option has an intrinsic value of zero if the option is

A. at the money.

B. out of the money.

C. in the money.

D. at the money and in the money.

E. at the money and out of the money.

E. at the money and out of the money

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Prior to expiration

A. the intrinsic value of a call option is greater than its actual value.

B. the intrinsic value of a call option is always positive.

C. the actual value of a call option is greater than the intrinsic value.

D. the intrinsic value of a call option is always greater than its time value.

C. the actual value of a call option is greater than the intrinsic value

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Prior to expiration

A. the intrinsic value of a put option is greater than its actual value.

B. the intrinsic value of a put option is always positive.

C. the actual value of a put option is greater than the intrinsic value.

D. the intrinsic value of a put option is always greater than its time value.

C. the actual value of a put option is greater than the intrinsic value

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If the stock price increases, 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

A. decreases; increases

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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

C. increases; decreases

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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.

D. the exercise price

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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

E. the stock price, time to expiration, and stock volatility

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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

D. the exercise price

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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.

A. the stock price

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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

E. the time to expiration, stock volatility, and exercise price

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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

A. the stock price

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The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.

A. positively; positively

B. negatively; positively

C. negatively; negatively

D. positively; negatively

E. not; not

B. negatively; positively

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The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price.

A. positively; positively

B. negatively; positively

C. negatively; negatively

D. positively; negatively

E. not; not

D. positively; negatively

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Delta is defined as

A. the change in the value of an option for a dollar change in the price of the underlying asset.

B. the change in the value of the underlying asset for a dollar change in the call price.

C. the percentage change in the value of an option for a 1% change in the value of the underlying asset.

D. the change in the volatility of the underlying stock price.

E. None of the options

A. the change in the value of an option for a dollar change in the price of the underlying asset

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A hedge ratio of 0.70 implies that a hedged portfolio should consist of

A. long 0.70 calls for each short stock.

B. short 0.70 calls for each long stock.

C. long 0.70 shares for each short call.

D. long 0.70 shares for each long call.

E. None of the options

C. long 0.70 shares for each short call

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A hedge ratio of 0.85 implies that a hedged portfolio should consist of A. long 0.85 calls for each short stock. B. short 0.85 calls for each long stock. C. long 0.85 shares for each short call. D. long 0.85 shares for each long call. E. None of the options

C. long 0.85 shares for each short call

A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______. A. negative; positive B. negative; negative C. positive; negative D. positive; positive E. zero; zero

C. positive; negative

A hedge ratio for a call is always A. equal to one. B. greater than one. C. between zero and one. D. between minus one and zero. E. of no restricted value.

C. between zero and one

A hedge ratio for a put is always A. equal to one. B. greater than one. C. between zero and one. D. between minus one and zero. E. of no restricted value.

D. between minus one and zero

The dollar change in the value of a stock call option is always A. lower than the dollar change in the value of the stock. B. higher than the dollar change in the value of the stock. C. negatively correlated with the change in the value of the stock. D. higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. E. lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

A. lower than the dollar change in the value of the stock

The percentage change in the stock call option price divided by the percentage change in the stock price is called A. the elasticity of the option. B. the delta of the option. C. the theta of the option. D. the gamma of the option.

A. the elasticity of the option

The elasticity 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.

C. the percentage change in the stock call option price divided by the percentage change in the stock price

The elasticity of a stock call option is always A. greater than one. B. smaller than one. C. negative. D. infinite. E. None of the options

A. greater than one

The elasticity of a stock put option is always A. positive. B. smaller than one. C. negative. D. infinite.

C. negative

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.

D. the sensitivity of the delta to the stock price

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.

D. means the portfolio has no tendency to change value as the underlying portfolio value changes

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.

B. the continued updating of the hedge ratio as time passes

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.

B. the risk incurred from unpredictable changes in volatility

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

A. Portfolio B 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.

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

C. The two portfolios have the same exposure 500 calls (0.6) = 300 shares + 500 shares = 800 shares; 800 shares = 800 shares

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

B. Portfolio A 400 calls (0.5) = 200 shares + 400 shares = 600 shares; 500 shares = 500 shares

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

B. Portfolio A 300 calls (0.3) = 90 shares + 600 shares = 690 shares; 685 shares = 685 shares.

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

C. -$1,150 -$100 + [-$1,500(0.7)] = -$1,150

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

B. -$850 -$800 + [-$100(0.5)] = -$850

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

A. -$345 -$225 + [-$300(0.4)] = -$345

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

D. -$520 -$400 + [-$200(0.6)] = -$520

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. -.17.

C. -0.70 Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.3 - 1.0 = -0.7

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. -.17.

D. -0.50 Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.5 - 1.0 = -0.5

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. -.17.

D. -0.40 Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.6 - 1.0 = -0.4

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. -.17.

D. -0.30 Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.7 - 1.0 = -0.3

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

E. -2.30 % stock price change = ($47 - $46)/$46 = 0.021739; % option price change = ($5.70 - $6.00)/$6 = - 0.05; - 0.05/0.021739 = - 2.30.

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.

C. that corresponds to the S&P 500 The S&P 500 Index is more like a portfolio that corresponds to the S&P 500 and thus is more protective of such a portfolio than of any of the other assets

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

D. negative; positive

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

C. positive; negative

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

D. increase; less than

Which one of the following variables influence 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

D. I, II, III and IV

Which one of the following variables influence 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

D. I, II, III, and IV

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

C. never exercise the call early

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

B. are more valuable

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 _____ 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

A. $0 and $40; -4/7 When ST = $150; P = $0; when ST = $80: P = $40; ($0 - $40)/($150 - $80) = -4/7

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.

C. sell when markets are falling and buy when markets are rising

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

B. $8 43 - 35

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

D. $4 12 - (43 - 35) = 4

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

C. 1.79 [(12.50 - 12)/12]/[(44 - 43)/43] = 1.79.

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.

B. the call price would decrease

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.

B. zero

Since deltas change as stock values change, portfolio hedge ratios must be constantly updated in active markets. This process is referred to as A. portfolio insurance. B. rebalancing. C. option elasticity. D. gamma hedging. E. dynamic hedging.

E. dynamic hedging

In volatile markets, dynamic hedging may be difficult to implement because A. prices move too quickly for effective rebalancing. B. as volatility increases, historical deltas are too low. C. price quotes may be delayed so that correct hedge ratios cannot be computed. D. volatile markets may cause trading halts. E. All of the options

E. All of the options

The time value of a call option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept. A. I B. I and II C. II and III D. II E. I and IV

E. I and IV

The time value of a put option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept. A. I B. I and II C. II and III D. II E. I and IV

E. I and IV

The intrinsic value of an at-the-money call option is equal to A. the call premium. B. zero. C. the stock price plus the exercise price. D. the striking price. E. None of the options

B. zero

As the underlying stock's price increased, the call option valuation function's slope approaches A. zero. B. one. C. two times the value of the stock. D. one-half times the value of the stock. E. infinity.

B. one

The intrinsic value of an in-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. E. None of the options

C. the stock price minus the exercise price

The intrinsic value of an in-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. None of the options

D. the exercise price minus the stock price

The hedge ratio of an option is also called the options A. alpha. B. beta. C. sigma. D. delta. E. rho.

D. delta

The intrinsic value of an at-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. None of the options

C. zero

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the intrinsic value of the call? A. $12 B. $10 C. $8 D. $23

C. $8 50 - 42

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call? A. $8 B. $12 C. $6 D. $4 E. Cannot be determined without more information

C. $6 14 - (50-42) = 6

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four 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.

B. the call price would decrease

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

C. zero

Vega is defined as A. the change in the value of an option for a dollar change in the price of the underlying asset. B. the change in the value of the underlying asset for a dollar change in the call price. C. the percentage change in the value of an option for a 1% change in the value of the underlying asset. D. the change in the volatility of the underlying stock price. E. the sensitivity of an option's price to changes in volatility.

E. the sensitivity of an option's price to changes in volatility