Chapter 16: Options

Question 1

Delta

Answer 1

Impact of Stock Prices

Question 2

Theta

Answer 2

Impact of Time To Expiration

Question 3

Vega

Answer 3

Impact of Stock Price Volatility

Question 4

Rho

Answer 4

Impact of Interest Rates

Question 5

Option’s Delta

Answer 5

Delta is the slope of the option pricing curve evaluated at current stock price

Question 6

Delta Hedging

Answer 6

The option writer’s portfolio has a zero delta. This is called delta neutral.

Question 7

Which of the following will produce the highest put price, all else constant? Assume that the options are all in-the-money.
A. $45 stock price; 50% standard deviation
B. $45 stock price; 75% standard deviation
C. $50 stock price; 50% standard deviation
D. $50 stock price; 75% standard deviation
E. Not enough information.

Answer 7

B. $45 stock price; 75% standard deviation

Question 8

Which of the following inputs for the Black-Scholes- model is not directly observable?
A. the risk-free rate
B. the time to maturity
C. the strike price
D. the standard deviation
E. none of the above

Answer 8

D. the standard deviation

Question 9

Which of the following will have a positive impact on the price of a put option?
A.Increase in the underlying stock price.
B. Decrease in the time to maturity.
C. Decrease in the risk-free rate of interest.
D. Decrease in the exercise price.
E. Decrease in the volatility of the underlying stock.

Answer 9

C. Decrease in the risk-free rate of interest.

Question 10

A call option that sells for $7.18 has a delta of 0.63. If the stock price decreases by $1.50, what is your estimate of the new call price?
A. $6.86
B. $6.24
C. $6.55
D. $6.37
E. $6.64

Answer 10

B. $6.24

= $7.18 + (0.63)(-$1.5) = $6.24