Question 1) When the stock price increases with all else remaining the

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

2) When the strike 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

3) When volatility 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

4) When dividends 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

5) When interest rates increase 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

6) When the time to maturity increases with all else remaining the same, which of the following is true?

A) European options always increase in value

B) The value of European options either stays the same or increases

C) There is no effect on European option values

D) European options are liable to increase or decrease in value

7) The price of a stock, which pays no dividends, is $30 and the strike price of a one year European call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

A) $5.00

B) $5.98

C) $4.98

D) $3.98

8) A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

A) $4.00

B) $3.86

C) $2.86

D) $0.86

9) Which of the following is NOT true?

A) An American put option is always worth less than the present value of the strike price

B) A European put option is always worth less than the present value of the strike price

C) A European call option is always worth less than the stock price

D) An American call option is always worth less than the stock price

10) Which of the following best describes the intrinsic value of an option?

A) The value it would have if the owner were forced to exercise immediately

B) The Black-Scholes-Merton price of the option

C) The lower bound for the option’s price

D) The amount paid for the option

11) Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?

A) Expected dividends increase

B) Interest rates decrease

C) The stock price volatility decreases

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