1. Which of the following statements about a call option is false?

a. A call option is the right, not the obligation, to buy the underlying asset.

b. A call option is in the money if the asset price is less than the strike price.
c. A call option is at the money if the asset price is the same as the strike price.
d. On the expiration date, a call option has no time value.

2. Before the expiration of a call option, if its intrinsic value is $13 and the market value of the option is $19, what is the time value of the option? What do we call the market value of the option?

a. $32; option premium

b. $6; option premium

c. $32; option price

d. $6; option price

3. Which of the following increases the value of a call option?

a. The price of the underlying asset decreases.

b. The volatility of the price of the underlying asset decreases.

c. The remaining time to expiration of the call option increases.

d. The underlying stock increases its dividend payment.

4. Which of the following decreases the value of a put option?

a. The price of the underlying asset decreases.

b. The underlying asset becomes riskier.

c. The interest rate decreases.

d. The strike price decreases.

5. Which of the following may create a synthetic loan?

a. Long a put, short the stock, and long a call.

b. Long a put, long the stock, and long a call.

c. Short a put, long the stock, and long a call.

d. Long a put, long the stock, and short a call.

6. What is the intrinsic value (IV) of a put if the underlying asset price (S) is $40 and the strike price (X) is $45? What is the IV if it is a call?

a. $0, $5

b. $5, $0

c. $5, $5

d. $0, $0

7. Which of the following positions is the most risky?

a. long a call

b. short a call

c. long a put

d. short a put

8. Which of the following statements about the Black-Scholes model is false?

a. It uses a continuously compounded risk-free rate.

b. d1 can be thought of as the expected moneyness of the call.

c. N(d1) is the cumulative probability of being out of the money.

d. The model assumes that the underlying asset price follows a lognormal distribution.

9. Which of the following statements is correct, given the following information?

a. The market maker’s profit of call A is 0.25.
b. If the market price of the underlying asset is 35, then the time value of put B is 0.1.
c. The time value for a put is usually higher than that for a call.
d. By using the market price of an option, we can calculate the implied volatility of the option.

10. What is the hedge ratio (h) for a call if PU is $52, PD is $45, and the strike price (S) is $48?
a. 1.33
b. 2.05
c. 1.75
d. 2.33

11. Which of the following is the correct meaning of a hedge ratio of 1/3?
a. Short one call to hedge a long position of three units of the underlying asset
b. Short three calls to hedge a long position of the underlying asset
c. Long one call to hedge a long position of three units of the underlying asset
d. Long three calls to hedge a long position of the underlying asset

12. Which of the following statements about risk-neutral probabilities is false?
a. Risk-neutral probabilities are probabilities that exist if investors are risk neutral.
b. Risk-neutral probabilities are the actual probabilities of the asset price going up and down.
c. Risk-neutral probabilities are the probabilities that ensure the asset price goes up with the risk-free rate.
d. Risk-neutral probabilities assume the underlying asset earns the risk-freerate.

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January 2014 Call A Put B Call C Bid 1.85 1.10 1.50 Ask 2.05 1.35 1.75 Strike 25 36 30.75 Last 1.85 1.15 1.60