Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch11

Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch11 -...

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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 11: Properties of Stock Options Multiple Choice Test Bank: Questions with Answers 1. When the stock price increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: C Stock price increases cause the values of calls to increase and the values of puts to decline. 2. When the strike price increases with all else remaining the same, which of the following is true? Strike price increases cause the values of puts to increase and the values of calls to decline. 3. When volatility increases with all else remaining the same, which of the following is true? Volatility increases the likelihood of a high payoff from either a call or a put option. The payoff can never be negative. It follows that as volatility increases the value of all options increase. 4. When dividends increase with all else remaining the same, which of the following is true? Dividends during the life of an option reduce the final stock price. As a result dividend increases cause puts to increase in value and calls to decrease in value.
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5. When interest rates increase with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: C Calls increase and puts decrease in value. As explained in the text an increase in interest rates causes the growth rate of the stock price to increase and the discount rate to increase. An increase in interest rates therefore reduces the value of puts because puts are hurt by both a discount rate increase and a growth rate increase. For calls it turns out that the growth rate increase is more important than the discount rate increase so that their values increase when interest rates increase. (Note that we are assuming all else equal and so the asset price does not change.)
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