Read the instructions carefully

FIN 423/63

Name: ___________________

The following information is given about options on the stock of a certain company.

S₀ = 23 X = 20

r_c = .09 T = .5

s² = .15

No dividends are expected.

Use this information to answer questions 1 through 3.

1. What value does the Black-Scholes model predict for the call?

a. 5.4

b. 1.1

c. 4.7

d. 6.5

e. none of the above

2. The price of a put on the stock is

a. 0.9

b. 8.6

c. 2.4

d. 4.9

e. none of the above

3. If we now assume that the stock pays a single dividend of 2.25 in three months, what stock price should we use in the model?

a. 17.75

b. 20.5

c. 20

d. 20.80

e. none of the above

4. Which of the following variables in the Black-Scholes option pricing model is the most difficult to obtain?

a. the volatility

b. the risk-free rate

c. the stock price

d. the time to expiration

the exercise price

5. Which of the following statements about the Black-Scholes model is not true?

a. decreasing the volatility lowers the call price

b. the expected stock price plays a role in the model

c. the risk-free rate is continuously compounded

d. the model is consistent with put-call parity

e. none of the above

6 Which of the following statements is not true about the law of one price

a. investors prefer more wealth to less

b. investments that offer the same return in all states must pay the risk-free rate

c. if two investment opportunities offer equivalent outcomes, they must have the same price

d. investors are risk neutral

none of the above

7 Arbitrage is a transaction designed to capture profits resulting from market efficiency.

8 The law of one price states that the price of an asset cannot change.

9 A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at

a. $2

b. $32

c. $33

d. $35

e. none of the above

10. A put option in which the stock price is $60 and the exercise price is $65 is said to be

a. in-the-money

b. out-of-the-money

c. at-the-money

d. exercisable

none of the above

11. An investor who owns a call option can close out the position by any of the following types of transactions except

a. exercise

b. offset

c. expiring out-of-the-money

d. buying a put

e. none of the above

12. An investor who exercises a call option on an index must

a. accept the cash difference between the index and the exercise price

b. purchase all of the stocks in the index in their appropriate proportions from the writer

c. immediately buy a put option to offset the call option

d. immediately write another call option to offset

none of the above

What amount must a call writer pay if a cash