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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 11: Properties of Stock Options Multiple Choice Test Bank: Questions with Answers 1. When the stock price increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: C Stock price increases cause the values of cal
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 11: Properties of Stock Options Multiple Choice est !ank: uestions #ith $ns#ers 1.When the stock price increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in valueB.Both calls and puts decrease in valueC.Calls increase in value while puts decrease in valueD.Puts increase in value while calls decrease in value Answer C !tock price increases cause the values of calls to increase and the values of puts to decline. .When the strike price increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in valueB.Both calls and puts decrease in valueC.Calls increase in value while puts decrease in valueD.Puts increase in value while calls decrease in value Answer D!trike price increases cause the values of puts to increase and the values of calls to decline.#.When volatilit$ increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in valueB.Both calls and puts decrease in valueC.Calls increase in value while puts decrease in valueD.Puts increase in value while calls decrease in value Answer A%olatilit$ increases the likelihood of a high pa$o& from either a call or a put option. 'he pa$o& can never (e negative. )t follows that as volatilit$ increases the value of all options increase.*.When dividends increase with all else remaining the same, which of the following is true? A.Both calls and puts increase in valueB.Both calls and puts decrease in valueC.Calls increase in value while puts decrease in valueD.Puts increase in value while calls decrease in value   Answer DDividends during the life of an option reduce the +nal stock price. As a result dividend increases cause puts to increase in value and calls to decrease in value..When interest rates increase with all else remaining the same, which of the following is true? A.Both calls and puts increase in valueB.Both calls and puts decrease in valueC.Calls increase in value while puts decrease in valueD.Puts increase in value while calls decrease in value Answer C Calls increase and puts decrease in value. As e-plained in the te-t an increase in interest rates causes the growth rate of the stock price to increase and the discount rate to increase. An increase in interest rates therefore reduces the value of puts (ecause puts are hurt ($ (oth a discount rate increase and a growth rate increase. or calls it turns out that the growth rate increase is more important than the discount rate increase so that their values increase when interest rates increase. /0ote that we are assuming all else eual and so the asset price does not change.23.When the time to maturit$ increases with all else remaining the same, which of the following is true? A.4uropean options alwa$s increase in valueB.'he value of 4uropean options either sta$s the same or increases C.'here is no e&ect on 4uropean option valuesD.4uropean options are lia(le to increase or decrease in value Answer DWhen the time to maturit$ increases from 5 to 6, 4uropean options usuall$increase in value. But the$ can decrease in value if a (ig dividend e-pected (etween 5 and 6. 7.'he price of a stock, which pa$s no dividends, is 8#9 and the strike price of a one $ear 4uropean call option on the stock is 8 . 'he risk:free rate is *; /continuousl$ compounded2. Which of the following is a lower (ound for the option such that there are ar(itrage opportunities if the price is (elow the lower (ound and no ar(itrage opportunities if it is a(ove the lower (ound?A.8.99B.8.<=C.8*.<=D.8#.<= Answer B   'he lower (ound in S  9 >  Ke -rT  . In this case it is 30 – 25e -0.04×1 = $5.98. =.A stock price /which pa$s no dividends2 is 89 and the strike price of a two $ear 4uropean put option is 8*. 'he risk:free rate is #; /continuousl$ compounded2. Which of the following is a lower (ound for the option such thatthere are ar(itrage opportunities if the price is (elow the lower (ound and no ar(itrage opportunities if it is a(ove the lower (ound?A.8*.99B.8#.=3C.8 .=3D.89.=3 Answer D 'he lower (ound in  Ke -rT    > S  9 In this case it is 54e −0.03×2  – 50= $0.86. <.Which of the following is 0' true? /Present values are calculated from the end of the life of the option to the (eginning.2 A.An American put option is alwa$s worth less than the present value of the strike price B.A 4uropean put option is alwa$s worth less than the present value of the strike price C.A 4uropean call option is alwa$s worth less than the stock priceD.An American call option is alwa$s worth less than the stock price Answer A)f it is optimal to e-ercise an American option toda$ and the stock price is ver$ low the option will (e worth more than the present value of the strikeprice19.Which of the following (est descri(es the intrinsic value of an option?A.'he value it would have if the owner had to e-ercise it immediatel$ or not at all B.'he Black:!choles:@erton price of the optionC.'he lower (ound for the options priceD.'he amount paid for the option Answer A 'he intrinsic value of an option is the value it would have if it were a(out the e-pire which is the same as the value in A.  11.Which of the following descri(es a situation where an American put option on a stock (ecomes more likel$ to (e e-ercised earl$?A.4-pected dividends increaseB.)nterest rates decreaseC.'he stock price volatilit$ decreasesD.All of the a(ove Answer C As the volatilit$ of the option decreases the time value declines and the option (ecomes more likel$ to (e e-ercised earl$. )n the case of A and B, time value increases and the option is less likel$ to (e e-ercised earl$.1 .Which of the following is true? A.An American call option on a stock should never (e e-ercised earl$B.An American call option on a stock should never (e e-ercised earl$ when no dividends are e-pectedC.'here is alwa$s some chance that an American call option on a stock will (e e-ercised earl$D.'here is alwa$s some chance that an American call option on a stock will (e e-ercised earl$ when no dividends are e-pected Answer B An American call option should never (e e-ercised earl$ when the underl$ing stock does not pa$ dividends. 'here are two reasons. irst, it is (est to dela$ pa$ing the strike price. !econd the insurance provided ($ the option /that the stock price will fall (elow the strike price2 is lost.1#.Which of the following is the put:call parit$ result for a non:dividend:pa$ing stock?A.'he 4uropean put price plus the 4uropean call price must eual the stock price plus the present value of the strike priceB.'he 4uropean put price plus the present value of the strike price must eual the 4uropean call price plus the stock priceC.'he 4uropean put price plus the stock price must eual the 4uropean call price plus the strike priceD.'he 4uropean put price plus the stock price must eual the 4uropean call price plus the present value of the strike price Answer D 'he put:call parit$ result is c+Ke -rT  =p+S  9 .1*.Which of the following is true when dividends are e-pected?A.Put:call parit$ does not holdB.'he (asic put:call parit$ formula can (e adusted ($ su(tracting the present value of e-pected dividends from the stock priceC.'he (asic put:call parit$ formula can (e adusted ($ adding the present
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