1. What, according to the Black-Scholes option valuation model, is the relationship be-tween the value of a call option and each of the following?

a) Risk as measured by the variability of the underlying stocks return

b) Interest rates

c) The term of the option (i.e., the length of time to expiration)

2 According to Black-Scholes option valuation and putcall parity, what will happen to the value of a put option if interest rates decline

3. How may the Black-Scholes option valuation model be used to determine the risk associated with the underlying stock?

4. An investor sells a stock short in July and its price declines in Novemberthe position has generated a profit. However, the individual does not want to close the position and realize the profit during this tax year. Instead, the investor wants to maintain the posi-tion until January so the gain will be taxed next year. How can the hedge ratio be used to reduce the risk associated with the price of the stock rising while still transferring the gain to the next tax year?

5 An investor expects the price of a stock to remain stable and writes a straddle. What is this individuals risk exposure? How may the investor close the position?