FREE FINANCE AND STUDY GAMES ABOUT OPTIONS

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FREE FINANCE AND STUDY GAMES ABOUT OPTIONS

STRATEGIES EXAM QUESTIONS

Actual Qs and Ans Expert-Verified Explanation

This Exam contains:

-Guarantee passing score -53 Questions and Answers -format set of multiple-choice -Expert-Verified Explanation

Question 1: Maximum Risk, Maximum Reward, Break-Even Stock Price of a Long Call

Position

Answer:

Maximum Risk = Call Premium Paid/Received Maximum Reward = unlimited Break-Even Stock Price = strike price + Call Premium Paid/Received Question 2: Effect of DECREASE in one factor on combined intrinsic value and time value of call

and put options:

Answer:

Stock Price: Call- Put+

Strike Price: Call+ Put-

Time to Exp: Call- Put-

Expected Volatility: Call- Put-

Carrying Costs: Call- Put+

Question 3: Maximum Risk, Maximum Reward, Break-Even Stock Price of a Short Put Position

Answer:

Maximum Risk = strike price - Put Premium Paid/Received Maximum Reward = Put Premium Paid/Received Break-Even Stock Price =strike price - Put Premium Paid/Received

Question 4: Maximum Risk, Maximum Reward, Break-Even Stock Price of a Short Call Position

Answer:

Maximum Risk = unlimited Maximum Reward = Call Premium Paid/Received Break-Even Stock Price = strike price + Call Premium Paid/Received

Question 5: Volatility is the only variable in an option pricing model that is

Answer:

unknown and therefor must be estimated. This fact makes the volatility estimate the key variable in the determination of an options value because it essentially determines the price of an option.Question 6: List the assumptions of the single-period binomial model:

• The risk-free rate of return and the volatility of a stock price

Answer:

are constant over the life of the option Question 7: The key difference between Single-Period Binomial Model and the Black-Scholes Options Pricing Model is that ...

Answer:

the Black-Scholes Options Pricing Model assumes that the stock prices change randomly and continuously throughout time so that the future distribution of stock prices is a normal distribution.Question 8: Investors must realize that limit buy orders and limit sell orders will not be filled if

Answer:

buy - limit price lower than market

sell- limit price is higher than market

Question 9: The fair value price by an option pricing model depends on

Answer:

the future volatility of the stock.

Question 10: List the assumptions of the single-period binomial model:

• The risk-neutral probability of a stock price increase or decrease

Answer:

is a function of the risk free rate of return andthe future volatility of the stock price Question 11: List the assumptions of the single-period binomial model:

• A stock price can

Answer:

move up or down only by fixed percentages over the single time period Question 12: Why does implied volatility of a stock sometimes differ with different options on same stock?

Answer:

Most speculators buy out-of-the-money options because they offer highest % returns, pushing up demand, higher prices, implying higher volatility.Question 13: Distinguish between the price of an option and the value of an option as calculated using an option pricing model

Answer:

*The price of an option is the price at which the option trades in the market.

*The value of an option is the price at which the option is worth according to an option pricing model Question 14: "Market orders" which are executed at the best available price at the time, are at risk of

Answer:

being filled at prices that reflect implied volatility rates that may be unrealistic, reflecting temporary market conditions rather than fair value.Question 15: The difference between the values calculated using the SPBM and B-S are

attributed to two different, but important assumptions:

• In SPBM, stock can take

Answer:

only 2 values after a year, while B-S can take on any non-neg value after one year

Question 16: Formulas for Ct and Pt

Answer:

(Pru x Cu) + (Prd x Cd) Ct = ----------------------- 1+r

(Pru x Pu) + (Prd x Pd) Pt = ----------------------- 1+r Question 17: Most option pricing models rely on three principles: 3.options can be combined with stocks and bonds in a portfolio such that

Answer:

the value of the portfolio over a very short time period is unaffected by changes in stock price. Using option pricing and stock pricing models, it is possible to create portfolios that have no risk over this short time period Question 18: Describe the three fundamental principles that underlie an option pricing model:

• At expiration, the value of an option

Answer:

equals its intrinsic value.

Since stock prices can be modelled, the value of an option at expiration over a range of different stock prices can be modelled.

Question 19: Factors affecting options value

Answer:

Stock Price Strike Price Time to Expiration Expected Volatility Carrying Costs