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| 1 | |
Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price? |
| | A) | Portfolio B |
| | B) | Portfolio A |
| | C) | The two portfolios have the same exposure |
| | D) | A if the stock price increases and B if it decreases |
| | E) | B if the stock price decreases and A if it increases |
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| 2 | |
A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price? |
| | A) | +$700 |
| | B) | +$500 |
| | C) | -$1,150 |
| | D) | -$520 |
| | E) | none of the above |
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| 3 | |
The Black-Scholes formula assumes that - the risk-free interest rate is constant over the life of the option.
- the stock price volatility is constant over the life of the option.
- the expected rate of return on the stock is constant over the life of the option.
- there will be no sudden extreme jumps in stock prices.
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| | A) | I and II |
| | B) | I and III |
| | C) | II and III |
| | D) | I, II and IV |
| | E) | I, II, III, and IV |
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| 4 | |
The dollar change in the value of a stock call option is always |
| | A) | higher than the dollar change in the value of the stock. |
| | B) | lower than the dollar change in the value of the stock. |
| | C) | negatively correlated with the change in the value of the stock. |
| | D) | B and C |
| | E) | A and B |
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| 5 | |
The elasticity of a stock call option is always |
| | A) | smaller than one. |
| | B) | greater than one. |
| | C) | negative. |
| | D) | infinite. |
| | E) | none of the above |
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| 6 | |
A put option on the S&P 500 index will best protect |
| | A) | a portfolio that corresponds to the S&P 500. |
| | B) | a portfolio of 50 bonds. |
| | C) | a portfolio of 100 shares of IBM stock. |
| | D) | a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks. |
| | E) | a portfolio that replicates the Dow. |
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| 7 | |
Which of the following variables influence the value of options?- Dividend yield of underlying stock.
- Time to expiration of the option.
- Level of interest rates.
- Stock price volatility.
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| | A) | I and IV |
| | B) | II and III |
| | C) | I, II, and IV |
| | D) | I, II, III, and IV |
| | E) | I, II and III |
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| 8 | |
The gamma of an option is |
| | A) | the volatility level for the stock that the option price implies. |
| | B) | the continued updating of the hedge ratio as time passes. |
| | C) | the percentage change in the stock call option price divided by the percentage change in the stock price. |
| | D) | the sensitivity of the delta to the stock price. |
| | E) | A and C |
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| 9 | |
If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that |
| | A) | the call price would increase. |
| | B) | the call price would not change. |
| | C) | the call price would decrease. |
| | D) | the put price would decrease. |
| | E) | the put price would not change. |
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| 10 | |
In volatile markets, dynamic hedging may be difficult to implement because |
| | A) | as volatility increases, historical deltas are too low. |
| | B) | prices move too quickly for effective rebalancing. |
| | C) | price quotes may be delayed so that correct hedge ratios cannot be computed. |
| | D) | volatile markets may cause trading halts. |
| | E) | all of the above |
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