uiz . A stock price is currently $20. Tomorrow, news is expected to be announced that will either increase the price by $5 or decrease the price by $5. What are the problems in using BlackScholes-Merton to value one-month options on the stock? (Points : 3) The probability distribution of the stock price in one month is not lognormal. The Black-Scholes model has not been proven The assumption that price will increase or decrease by $5 cannot be made Stock prices are likely to move more than $5 Question 2. 2. An option that has a low value is called (Points : 3) In the money Out of the money A junk option A tradable option Question 3. 3. The implied volatility as a function of the strike price and time to maturity is known as (Points : 3) A volatility surface A volatility spread A volatility scrub A volatility strike Question 4. 4. When the asset price is positively correlated with volatility, the volatility tends to __________ as the asset price increases (Points : 3) Decrease Increase Remain the same Move in the opposite direction Question 5. 5. Problems with test an option pricing model empirically include all of the following except (Points : 3) The problem of obtaining synchronous data on stock prices and option prices The problem of estimating the dividends that will be paid on the stock during the options life The problem of distinguishing between situations where the market is inefficient and situations where the option pricing model is incorrect The problems of estimating stock price volatility All of the above are problems of testing option pricing models empirically Question 6. 6. Volatility smile jumps tend to make both tails of the stock price distribution (Points : 3) Heavier than those of the lognormal distribution Lighter than those of the lognormal distribution Vary unexpectedly from those of the lognormal distribution Immeasurable Question 7. 7. Some possible causes of volatility smile for foreign currencies include (Points : 3) Exchange rate exhibit jumps rather than continuous changes Exchange rates are always changing Volatility of exchange rate is stochastic Both A and C Question 8. 8. An argument that is an attempt to explain the pronounced volatility skew in equity markets since 1987 is called (Points : 3) Crashophobia Speculation Lackophobia Volaphobia Question 9. 9. The market price of a European call is $3.00 and its price given by Black-Scholes-Merton model with a volatility of 30% is $3.50. The price given by this Black-Scholes-Merton model for a European put option with the same strike price and time to maturity is $1.00. What should the market price of the put option be? (Points : 3) 0.50 1.01 0.75 0.32 Question 10. 10. An examples of spread (strategy) that can be used for trading options include (Points : 3) The butterfly (or iron butterfly) spread The swap spread The inverted spread The peanut butter spread