#### Details of this Paper

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

**Description**

solution

**Question**

Question;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="msonormal">

Paper#51852 | Written in 18-Jul-2015

Price :*$31*