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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 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 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. 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 above. Answer: C Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option. 3. 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 above. Answer: A Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option. 15 Chapter 21 Option Valuation 4. 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 above. Answer: D Difficulty: Easy Rationale: The difference between the actual option price and the intrinsic value is called the time value of the option. 5. 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) 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. 6. 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) 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. 7. 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. 16 Chapter 21 Option Valuation 8. 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....
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This note was uploaded on 05/09/2011 for the course MGMT 223 taught by Professor Zhenxi during the Spring '11 term at HKU.
 Spring '11
 ZHENXI

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