1、Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 11: Properties of Stock Options Multiple Choice Test Bank: Questions with Answers1. When the stock price increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in valueB. Both cal
2、ls and puts decrease in valueC. Calls increase in value while puts decrease in valueD. 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 remaini
3、ng the same, which of the following is true? A. Both calls and puts increase in valueB. Both calls and puts decrease in valueC. Calls increase in value while puts decrease in valueD. Puts increase in value while calls decrease in value Answer: DStrike price increases cause the values of puts to incr
4、ease and the values of calls to decline.3. When volatility increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in valueB. Both calls and puts decrease in valueC. Calls increase in value while puts decrease in valueD. Puts increase in value whil
5、e calls decrease in value Answer: AVolatility 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 o
6、f the following is true? A. Both calls and puts increase in valueB. Both calls and puts decrease in valueC. Calls increase in value while puts decrease in valueD. Puts increase in value while calls decrease in value Answer: DDividends during the life of an option reduce the final stock price. As a r
7、esult dividend increases cause puts to increase in value and calls to decrease in value.5. When interest rates increase with all else remaining the same, which of the following is true? A. Both calls and puts increase in valueB. Both calls and puts decrease in valueC. Calls increase in value while p
8、uts decrease in valueD. 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 ra
9、tes 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
10、are assuming all else equal and so the asset price does not change.)6. When the time to maturity increases with all else remaining the same, which of the following is true? A. European options always increase in valueB. The value of European options either stays the same or increases C. There is no
11、effect on European option valuesD. European options are liable to increase or decrease in value Answer: DWhen the time to maturity increases from X to Y, European options usually increase in value. But they can decrease in value if a big dividend expected between X and Y. 7. The price of a stock, wh
12、ich pays no dividends, is $30 and the strike price of a one year European call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and
13、no arbitrage opportunities if it is above the lower bound?A. $5.00B. $5.98C. $4.98D. $3.98 Answer: BThe lower bound in S0 Ke-rT. In this case it is 30 25e-0.041 = $5.98.8. A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54. The risk-free rate
14、 is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?A. $4.00B. $3.86C. $2.86D. $0.86 Answer: DThe lower bound in Ke-rT
15、S0 In this case it is 54e0.032 50= $0.86.9. Which of the following is NOT true? (Present values are calculated from the end of the life of the option to the beginning.) A. An American put option is always worth less than the present value of the strike price B. A European put option is always worth
16、less than the present value of the strike price C. A European call option is always worth less than the stock priceD. An American call option is always worth less than the stock price Answer: AIf it is optimal to exercise an American option today and the stock price is very low the option will be wo
17、rth more than the present value of the strike price10. Which of the following best describes the intrinsic value of an option?A. The value it would have if the owner had to exercise it immediately or not at all B. The Black-Scholes-Merton price of the optionC. The lower bound for the options priceD.
18、 The amount paid for the option Answer: AThe intrinsic value of an option is the value it would have if it were about the expire which is the same as the value in A.11. Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?A. E
19、xpected dividends increaseB. Interest rates decreaseC. The stock price volatility decreasesD. All of the above Answer: C As the volatility of the option decreases the time value declines and the option becomes more likely to be exercised early. In the case of A and B, time value increases and the op
20、tion is less likely to be exercised early.12. Which of the following is true? A. An American call option on a stock should never be exercised earlyB. An American call option on a stock should never be exercised early when no dividends are expectedC. There is always some chance that an American call
21、option on a stock will be exercised earlyD. There is always some chance that an American call option on a stock will be exercised early when no dividends are expected Answer: B An American call option should never be exercised early when the underlying stock does not pay dividends. There are two rea
22、sons. First, it is best to delay paying the strike price. Second the insurance provided by the option (that the stock price will fall below the strike price) is lost.13. Which of the following is the put-call parity result for a non-dividend-paying stock?A. The European put price plus the European c
23、all price must equal the stock price plus the present value of the strike priceB. The European put price plus the present value of the strike price must equal the European call price plus the stock priceC. The European put price plus the stock price must equal the European call price plus the strike
24、 priceD. The European put price plus the stock price must equal the European call price plus the present value of the strike price Answer: DThe put-call parity result is c+Ke-rT=p+S0.14. Which of the following is true when dividends are expected?A. Put-call parity does not holdB. The basic put-call
25、parity formula can be adjusted by subtracting the present value of expected dividends from the stock priceC. The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock priceD. The basic put-call parity formula can be adjusted by subtracting the d
26、ividend yield from the interest rate Answer: BPut call parity still holds for European options providing the present value of the dividends is subtracted from the stock price.15. The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6. The stock price is $
27、51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. What is the price of a one-year European put option on the stock with a strike price of $50? A. $9.91B. $7.00C. $6.00D. $2.09 Answer: DPut-call parity is c+Ke-rT=p+S0. In this case K=50, S0=51
28、, r=0.06, T=1, and c=6. It follows thatp=6+50e-0.06151 = 2.09.16. The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. A dividend of $1 is expec
29、ted in six months. What is the price of a one-year European put option on the stock with a strike price of $50? A. $8.97B. $6.97C. $3.06D. $1.12 Answer: CPut-call parity is c+Ke-rT=p+S0. In this case K=50, S0=51, r=0.06, T=1, and c=6. The present value of the dividend is 1e0.060.5 = 0.97. It follows
30、 thatp=6+50e-0.061(51-0.97) = 3.06.17. A European call and a European put on a stock have the same strike price and time to maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01am news reaches the market that has no effect on the stock price or i
31、nterest rates, but increases volatilities. As a result the price of the call changes to $4.50. Which of the following is correct?A. The put price increases to $6.00B. The put price decreases to $2.00C. The put price increases to $5.50D. It is possible that there is no effect on the put price Answer:
32、 CThe price of the call has increased by $1.50. From put-call parity the price of the put must increase by the same amount. Hence the put price will become 4.00 +1.50 = $5.50.18. Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is worth $6. A European pu
33、t with a strike price of $50 and a maturity of one year is worth $7. The current stock price is $49. Which of the following is true? A. The call price is high relative to the put priceB. The put price is high relative to the call priceC. Both the call and put must be mispricedD. None of the above An
34、swer: DIn this case because interest rates are zero c+K=p+S0. The left side of this equation is 50+6=56. The right side is 49+7=56. There is no mispricing.19. Which of the following is true for American options?A. Put-call parity provides an upper and lower bound for the difference between call and
35、put pricesB. Put call parity provides an upper bound but no lower bound for the difference between call and put prices C. Put call parity provides an lower bound but no upper bound for the difference between call and put prices D. There are no put-call parity results Answer: APut call parity provide
36、s both an upper and lower bound for the difference between call and put prices. See equation (11.11).20. Which of the following can be used to create a long position in a European put option on a stock?A. Buy a call option on the stock and buy the stockB. Buy a call on the stock and short the stock
37、C. Sell a call option on the stock and buy the stockD. Sell a call option on the stock and sell the stock Answer: BAs payoff diagrams show a call on a stock combined with a short position in the stock gives a payoff similar to a put option. Alternatively we can use put-call parity, which shows that a call minus the stock equals the put minus the present value of the strike price.
