1. Which of the following is true of a box spread?

A. It is a package consisting of a bull spread and a bear spread

B. It involves two call options and two put options

C. It has a known value at maturity

1. Which of the following creates a bull spread?

A. Buy a low strike price put and sell a high strike price put

B. Buy a high strike price put and sell a low strike price put

C. Buy a high strike price call and sell a low strike price put

D. Buy a high strike price put and sell a low strike price call

1. Which of the following creates a bear spread?

B. Buy a high strike price call and sell a low strike price call

A. Buy a low strike price call and sell a high strike price call

C. Buy a low strike price call and sell a high strike price put

D. Buy a low strike price put and sell a high strike price call

1. Which of the following describes how American options can be valued using a binomial tree?

A. Check whether early exercise is optimal at all nodes where the option is in-the-money

B. Check whether early exercise is optimal at the final nodes

C. Check whether early exercise is optimal at the penultimate nodes and the final nodes

1. In a binomial tree created to value an option on a stock, the expected return on stock is

B. The return required by the market

It is impossible to know without more information

1. In a binomial tree created to value an option on a stock, what is the expected return on the option?

B. The return required by the market

D. It is impossible to know without more information

1. Which of the following is true for a call option on a stock worth $50

D. As a stock’s expected return increases the price of the option on the stock stays the same

A. As a stock’s expected return increases the price of the option increases

B. As a stock’s expected return increases the price of the option decreases

C. As a stock’s expected return increases the price of the option might increase or decrease

1. A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%.

C. The parameter u is the same for both trees but p is not

A. The parameters p and u are the same for both trees

B. The parameter p is the same for both trees but u is not

1. When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true?

D. The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated

A. The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations

C. The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting

1. Which of the following is assumed by the Black-Scholes-Merton model?

B. The stock price at a future time is lognormal

A. The return from the stock in a short period of time is lognormal

C. The stock price at a future time is normal

1. Which of the following is a definition of volatility

A. The standard deviation of the return, measured with continuous compounding, in one year

B. The variance of the return, measured with continuous compounding, in one year

C. The standard deviation of the stock price in one year

D. The variance of the stock price in one year

1. What does N(x) denote?

B. The area under a normal distribution up to x

A. The area under a normal distribution from zero to x

C. The area under a normal distribution beyond x

D. The area under the normal distribution between - x and x

1. The risk-free rate is 5% and the expected return on a non-dividend-paying stock is 12%. Which of the following is a way of valuing a derivative?

C. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%

A. Assume that the expected growth rate for the stock price is 17% and discount the expected payoff at 12%

B. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%

D. Assuming that the expected growth rate for the stock price is 12% and discounting the expected payoff at 5%

1. When there are two dividends on a stock, Black’s approximation sets the value of an American call option equal to which of the following

D. The greater of the value in B and the value assuming no early exercise

A. The value of a European option maturing just before the first dividend

B. The value of a European option maturing just before the second (final) dividend

C. The greater of the values in A and B

1. Which of the following is measured by the VIX index

C. Implied volatilities for options trading on the S&P 500 index

A. Implied volatilities for stock options trading on the CBOE

B. Historical volatilities for stock options trading on CBOE

D. Historical volatilities for options trading on the S&P 500 index

1. Which of the following is NOT true?

A. Risk-neutral valuation assumes that investors are risk neutral

Options can be valued based on the assumption that investors are risk neutral

In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate

In risk-neutral valuation the risk-free rate is used to discount expected cash flows

1. Which of the following is a way of extending the Black-Scholes-Merton formula to value a European call option on a stock paying a single dividend?

D. Subtract the present value of the dividend from the stock price

A. Reduce the maturity of the option so that it equals the time of the dividend

B. Subtract the dividend from the stock price

C. Add the dividend to the stock price

1. When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock, which of the following is true?

D. The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased

A. The binomial tree price converges to a price slightly above the Black-Scholes-Merton price as the number of time steps is increased

B. The binomial tree price converges to a price slightly below the Black-Scholes-Merton price as the number of time steps is increased

1. Which of the following is true?

B. An employee stock option tends to be exercised earlier than an OTC option with the same terms

A. An employee stock option is usually held to maturity

C. An employee stock options tends to be exercised later than an OTC option with the same terms

D. Employee stock options are usually exercised as early as possible

1. Which of the following is NOT usually true about employee stock options?

B. They can be sold to other employees

C. They are often at-the-money when issued

D. Their value is currently a charge to the income statement

1. Which of the following are true of employee stock options?

D. They are commonly valued as though they are regular European options but with a reduced life.

A. They are commonly valued as though they are regular American options

B. They are commonly valued as though they are regular American options, but with a reduced life.

C. They are commonly valued as though they are regular European option

1. Which of the following was true about employee stock options prior to 1995?

D. Options which were at-the-money when issued did not affect a company’s financial statements

A. The options never had any affect on a company’s financial statements

B. The value of options which were at-the-money when issued had to be expensed on the income statement

C. The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

1. Which of the following was true about employee stock options between 1996 and 2004?

C. The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

A. The options never had any affect on a company’s financial statements

B. The value of options which were at-the-money when issued had to be expensed on the income statement

D. Options which were at-the-money when issued did not affect a company’s financial statements

1. Which of the following was true after 2005?

B. The value of options which were at-the-money when issued had to be expensed on the income statement

A. The options never had any affect on a company’s financial statements

C. The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

D. Options which were at-the-money when issued did not affect a company’s financial statements

1. Which of the following is true about employee stock options after they have been issued?

D. They never have to be revalued

A. They have to be revalued every year

B. They have to be revalued every quarter

C. They have to be revalued every day like other derivatives

1. Which of the following is true about the practice of backdating a stock options grant?

B. It is illegal in the majority of states in the U.S., but not all states

C. It is illegal in roughly half the states in the U.S.

D. It is unethical, but not illegal

1. A company surprises the market with an announcement that it has granted stock options to senior executives. The options are exercised four years later. When does dilution take place?

B. Dilution takes place on the announcement date

A. Dilution takes place when the options are exercised

C. Dilution takes place gradually over the four years

Derivatives Quiz 3 - Chapters 11,12,13 and 14

Authored by Harry Vadalkar

Business

Professional Development

Used 3+ times

Derivatives Quiz 3 - Chapters 11,12,13 and 14

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50 questions

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MULTIPLE CHOICE QUESTION

5 mins • 1 pt

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?

100

200

300

400

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?

A. A one-year zero-coupon bond plus a one-year call option worth about $59

B. A one-year zero-coupon bond plus a one-year call option worth about $49

C. A one-year zero-coupon bond plus a one-year call option worth about $39

D. A one-year zero-coupon bond plus a one-year call option worth about $29

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

Which of the following describes a covered call?

A. A long call option on a stock plus a long position in the stock

B. A long call option on a stock plus a short put option on the stock

C. A short call option on a stock plus a short position in the stock

D. A short call option on a stock plus a long position in the stock

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

1. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?

A. $100

B. $200

C. $300

D. $400

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

1. Which of the following describes a protective put?

A. A long put option on a stock plus a long position in the stock

B. A long put option on a stock plus a short position in the stock

C. A short put option on a stock plus a short call option on the stock

D. A short put option on a stock plus a long position in the stock

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

1. How can a strangle trading strategy be created?

A. Buy one call and one put with the same strike price and same expiration date

B. Buy one call and one put with different strike prices and same expiration date

C. Buy one call and two puts with the same strike price and expiration date

D. Buy two calls and one put with the same strike price and expiration date

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

1. How can a strap trading strategy be created?

A. Buy one call and one put with the same strike price and same expiration date

B. Buy one call and one put with different strike prices and same expiration date

C. Buy one call and two puts with the same strike price and expiration date

D. Buy two calls and one put with the same strike price and expiration date

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Derivatives Quiz 3 - Chapters 11,12,13 and 14

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?

When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?

Which of the following describes a covered call?

1. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?

1. Which of the following describes a protective put?

1. How can a strangle trading strategy be created?

1. How can a strap trading strategy be created?

1. How can a straddle be created?

1. How can a strip trading strategy be created?

1. Which of the following is true of a box spread?

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