Finance 28 MCQ’S-When the non-dividend paying stock price is $20, the strike price is $20….

QUESTION 1
1. When the non-dividend paying stock price is
$20, the strike price is $20, the risk-free rate is 5%, the volatility is 20%
and the time to maturity is 3 months which of the following is the price of a
European put option on the stock

a. 19.7N(-0.1)-20N(-0.2)

b. 20N(-0.1)-20N(-0.2)

c. 19.7N(-0.2)-20N(-0.1)

d. 20N(-0.2)-20N(-0.1)
1 points
QUESTION 2
1. A stock provides an expected return of 10%
per year and has a volatility of 20% per year. What is the expected value of
the continuously compounded return in one year?

a. 6%

b. 8%

c. 10%

d. 12%

QUESTION 3
1. A stock price is 20, 22, 19, 21, 24, and 24
on six successive Fridays. Which of the following is closest to the volatility
per annum estimated from this data?

a. 50%

b. 60%

c. 70%

d. 80%
1 points
QUESTION 4
1. Which of the following is true for a one-year
call option on a stock that pays dividends every three months?

a. It is never optimal to exercise the option
early

b. It can be optimal to exercise the option at
any time

c. It is only ever optimal to exercise the
option immediately after an ex-dividend date

d. None of the above
1 points
QUESTION 5
1. An investor has earned 2%, 12% and -10% on
equity investments in successive years (annually compounded). This is equivalent
to earning which of the following annually compounded rates for the three year
period.

a. 1.33%

b. 1.23%

c. 1.13%

d. 0.93%
1 points
QUESTION 6
1. The volatility of a stock is 18% per year.
Which of the following is closest to the volatility per month?

a. 1.5%

b. 3.0%

c. 5.2%

d. 6.3%
1 points
QUESTION 7
1. What was the original Black-Scholes-Merton
model designed to value?

a. A European option on a stock providing no
dividends

b. A European or American option on a stock
providing no dividends

c. A European option on any stock

d. A European or American option on any stock

1. Which of the following is NOT true?

a. Risk-neutral valuation provides prices that
are only correct in a world where investors are risk-neutral

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

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

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

QUESTION 9
1. Which of the following is true for a one-year
call option on a stock that pays dividends every three months?

a. It is never optimal to exercise the option
early

b. It can be optimal to exercise the option at
any time

c. It is only ever optimal to exercise the
option immediately after an ex-dividend date

d. None of the above
1 points
QUESTION 10
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

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

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

QUESTION 11
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?

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%

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

d. Assuming
that the expected growth rate for the stock price is 12% and discounting the
expected payoff at 5%
1 points
QUESTION 12
1. An investor has earned 2%, 12% and -10% on
equity investments in successive years (annually compounded). This is
equivalent to earning which of the following annually compounded rates for the
three year period.

a. 1.33%

b. 1.23%

c. 1.13%

d. 0.93%

QUESTION 13
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%. Which of the following are true?

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

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

d. None of the above

QUESTION 14
1. In a binomial tree created to value an option
on a stock, the expected return on stock is

a. Zero

b. The return required by the market

c. The risk-free rate

d. It is impossible to know without more
information

QUESTION 15
1. The current price of a non-dividend-paying
stock is $30. Over the next six months it is expected to rise to $36 or fall to
$26. Assume the risk-free rate is zero. What is the risk-neutral probability of
that the stock price will be $36?

a. 0.6

b. 0.5

c. 0.4

d. 0.3

QUESTION 16
1. The current price of a non-dividend-paying
stock is $30. Over the next six months it is expected to rise to $36 or fall to
$26. Assume the risk-free rate is zero. An investor sells call options with a
strike price of $32. What is the value of each call option?

a. $1.6

b. $2.0

c. $2.4

d. $3.0

QUESTION 17
1. The current price of a non-dividend paying
stock is $50. Use a two-step tree to value an American put option on the stock
with a strike price of $48 that expires in 12 months. Each step is 6 months,
the risk free rate is 5% per annum, and the volatility is 20%. Which of the
following is the option price?

a. $1.95

b. $2.00

c. $2.05

d. $2.10

QUESTION 18
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%. Which of the following are true?

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

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

d. None of the above
1 points
QUESTION 19
1. The current price of a non-dividend paying
stock is $30. Use a two-step tree to value a European call option on the stock
with a strike price of $32 that expires in 6 months. Each step is 3 months, the
risk free rate is 8% per annum with continuous compounding. What is the option
price when u = 1.1 and d = 0.9.

a. $1.29

b. $1.49

c. $1.69

d. $1.89
1 points
QUESTION 20
1. In a binomial tree created to value an option
on a stock, the expected return on stock is

a. Zero

b. The return required by the market

c. The risk-free rate
QUESTION 1
1. When the non-dividend paying stock price is
$20, the strike price is $20, the risk-free rate is 5%, the volatility is 20%
and the time to maturity is 3 months which of the following is the price of a
European put option on the stock

a. 19.7N(-0.1)-20N(-0.2)

b. 20N(-0.1)-20N(-0.2)

c. 19.7N(-0.2)-20N(-0.1)

d. 20N(-0.2)-20N(-0.1)
1 points
QUESTION 2
1. A stock provides an expected return of 10%
per year and has a volatility of 20% per year. What is the expected value of
the continuously compounded return in one year?

a. 6%

b. 8%

c. 10%

d. 12%

QUESTION 3
1. A stock price is 20, 22, 19, 21, 24, and 24
on six successive Fridays. Which of the following is closest to the volatility
per annum estimated from this data?

a. 50%

b. 60%

c. 70%

d. 80%
1 points
QUESTION 4
1. Which of the following is true for a one-year
call option on a stock that pays dividends every three months?

a. It is never optimal to exercise the option
early

b. It can be optimal to exercise the option at
any time

c. It is only ever optimal to exercise the
option immediately after an ex-dividend date

d. None of the above
1 points
QUESTION 5
1. An investor has earned 2%, 12% and -10% on
equity investments in successive years (annually compounded). This is equivalent
to earning which of the following annually compounded rates for the three year
period.

a. 1.33%

b. 1.23%

c. 1.13%

d. 0.93%
1 points
QUESTION 6
1. The volatility of a stock is 18% per year.
Which of the following is closest to the volatility per month?

a. 1.5%

b. 3.0%

c. 5.2%

d. 6.3%
1 points
QUESTION 7
1. What was the original Black-Scholes-Merton
model designed to value?

a. A European option on a stock providing no
dividends

b. A European or American option on a stock
providing no dividends

c. A European option on any stock

d. A European or American option on any stock

1. Which of the following is NOT true?

a. Risk-neutral valuation provides prices that
are only correct in a world where investors are risk-neutral

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

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

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

QUESTION 9
1. Which of the following is true for a one-year
call option on a stock that pays dividends every three months?

a. It is never optimal to exercise the option
early

b. It can be optimal to exercise the option at
any time

c. It is only ever optimal to exercise the
option immediately after an ex-dividend date

d. None of the above
1 points
QUESTION 10
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

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

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

QUESTION 11
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?

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%

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

d. Assuming
that the expected growth rate for the stock price is 12% and discounting the
expected payoff at 5%
1 points
QUESTION 12
1. An investor has earned 2%, 12% and -10% on
equity investments in successive years (annually compounded). This is
equivalent to earning which of the following annually compounded rates for the
three year period.

a. 1.33%

b. 1.23%

c. 1.13%

d. 0.93%

QUESTION 13
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%. Which of the following are true?

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

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

d. None of the above

QUESTION 14
1. In a binomial tree created to value an option
on a stock, the expected return on stock is

a. Zero

b. The return required by the market

c. The risk-free rate

d. It is impossible to know without more
information

QUESTION 15
1. The current price of a non-dividend-paying
stock is $30. Over the next six months it is expected to rise to $36 or fall to
$26. Assume the risk-free rate is zero. What is the risk-neutral probability of
that the stock price will be $36?

a. 0.6

b. 0.5

c. 0.4

d. 0.3

QUESTION 16
1. The current price of a non-dividend-paying
stock is $30. Over the next six months it is expected to rise to $36 or fall to
$26. Assume the risk-free rate is zero. An investor sells call options with a
strike price of $32. What is the value of each call option?

a. $1.6

b. $2.0

c. $2.4

d. $3.0

QUESTION 17
1. The current price of a non-dividend paying
stock is $50. Use a two-step tree to value an American put option on the stock
with a strike price of $48 that expires in 12 months. Each step is 6 months,
the risk free rate is 5% per annum, and the volatility is 20%. Which of the
following is the option price?

a. $1.95

b. $2.00

c. $2.05

d. $2.10

QUESTION 18
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%. Which of the following are true?

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

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

d. None of the above
1 points
QUESTION 19
1. The current price of a non-dividend paying
stock is $30. Use a two-step tree to value a European call option on the stock
with a strike price of $32 that expires in 6 months. Each step is 3 months, the
risk free rate is 8% per annum with continuous compounding. What is the option
price when u = 1.1 and d = 0.9.

a. $1.29

b. $1.49

c. $1.69

d. $1.89
1 points
QUESTION 20
1. In a binomial tree created to value an option
on a stock, the expected return on stock is

a. Zero

b. The return required by the market

c. The risk-free rate

d. It is impossible to know without more
information
1 points
QUESTION 21
1. If the volatility of a non-dividend-paying stock
is 20% per annum and a risk-free rate is 5% per annum, which of the following
is closest to the Cox, Ross, Rubinstein parameter p for a tree with a
three-month time step?

a. 0.50

b. 0.54

c. 0.58

d. 0.62

QUESTION 22
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 loss (after
the cost of the options is taken into account)?

a. $100

b. $200

c. $300

d. $400
1 points
QUESTION 23
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

d. All of the above
1 points
QUESTION 24
1. What is the number of different option series
used in creating a butterfly spread?

a. 1

b. 2

c. 3

d. 4
1 points
QUESTION 25
1. 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?

a. $100

b. $200

c. $300

d. $400
1 points

QUESTION 26
1. How can a straddle 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

1.
question 27- 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?

a. $100

b. $200

c. $300

d. $400

1 points
QUESTION 28
1. What is a description of the trading strategy
where an investor sells a 3-month call option and buys a one-year call option,
where both options have a strike price of $100 and the underlying stock price
is $75?

a. Neutral Calendar Spread

b.Bullish
Calendar Spread

c. Bearish Calendar Spread

d. None of the above
d. It is impossible to know without more
information
1 points
QUESTION 21
1. If the volatility of a non-dividend-paying stock
is 20% per annum and a risk-free rate is 5% per annum, which of the following
is closest to the Cox, Ross, Rubinstein parameter p for a tree with a
three-month time step?

a. 0.50

b. 0.54

c. 0.58

d. 0.62

QUESTION 22
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 loss (after
the cost of the options is taken into account)?

a. $100

b. $200

c. $300

d. $400
1 points
QUESTION 23
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

d. All of the above
1 points
QUESTION 24
1. What is the number of different option series
used in creating a butterfly spread?

a. 1

b. 2

c. 3

d. 4
1 points
QUESTION 25
1. 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?

a. $100

b. $200

c. $300

d. $400
1 points

QUESTION 26
1. How can a straddle 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

1.
question 27- 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?

a. $100

b. $200

c. $300

d. $400

1 points
QUESTION 28
1. What is a description of the trading strategy
where an investor sells a 3-month call option and buys a one-year call option,
where both options have a strike price of $100 and the underlying stock price
is $75?

a. Neutral Calendar Spread

b.Bullish
Calendar Spread

c. Bearish Calendar Spread

d. None of the above