Chap021 - Chapter 21 Option Valuation Multiple Choice...

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Unformatted text preview: Chapter 21 Option Valuation Multiple Choice Questions 1. Before expiration, the time value of an in the money stock 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 above. Answer: B Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option. 2. A stock 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) A and C. E) A and B. Answer: E Difficulty: Easy Rationale: Intrinsic value can never be negative; thus it is set equal to zero for out of the money and at the money options. 3. 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 call option is greater than the intrinsic value. D) the intrinsic value of a call option is always greater than its time value. E) none of the above. Answer: C Difficulty: Moderate Rationale: Prior to expiration, any option will be selling for a positive price, thus the actual value is greater than the intrinsic value. 500 Bodie, Investments, Sixth Edition Chapter 21 Option Valuation 4. 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 Answer: A Difficulty: Moderate Rationale: As stock prices increases, call options become more valuable (the owner can buy the stock at a bargain price). As stock prices increase, put options become less valuable (the owner can sell the stock at a price less than market price). 5. 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. E) none of the above. Answer: D Difficulty: Moderate Rationale: The exercise price is negatively correlated with the call option price. 6. 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 Answer: B Difficulty: Moderate Rationale: The lower the stock price, the more valuable the call option. The higher the striking price, the more valuable the put option. 501 Bodie, Investments, Sixth Edition Chapter 21 Option Valuation 7. All the inputs in the Black-Scholes Option Pricing Model are directly observable except A) the price of the underlying security....
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This note was uploaded on 02/22/2009 for the course ECONOMICS 4313 taught by Professor Tsui during the Spring '09 term at HKU.

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Chap021 - Chapter 21 Option Valuation Multiple Choice...

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