FIN 494 Exam Prepared 7_2020 | FIN494 Exam Prepared 7_Graded A

FIN 494 Exam Prepared 7_Graded A Question 1 1. Which Greek shows the sensitivity of option price to the volatility of the underlying stock? a. Delta b. Gamma c. Vega d. Theta 10 points Question 2 1. If the implied volatility of an option is lower than your expectation of future stock volatility, you would be more likely to conclude that the option is a. Underpriced because the observed price of the option is lower than you think it should be b. Correctly priced because implied volatility makes the Black-Scholes option price match the observed price c. Over-priced because the implied volatility, when plugged into Black-Scholes model, generates a value higher than the observed price 10 points Question 3 1. Which of the Greeks measures the sensitivity of option price to the remaining time to expiration? a. Elasticity b. Vega c. Gamma d. Theta 10 points Question 4 1. Which of the Greeks is greater than 1 in absolute value? a. Elasticity of an option b. Delta of an option c. Gamma of the underlying stock d. Vega of the underlying stock 10 points Question 5 1. Trading shares of the underlying stock will affect a. The gamma of a portfolio b. The delta of a portfolio c. the vega of a portfolio 10 points Question 6 1. If debt and equity can be modeled as options on the firm’s assets, then the strike price of these options is a. Face value of debt b. Value of the firm c. Price of the bond 1. When the debt and equity can be modelled as options on the firm asset, then the strike price of the option will be value of the firm because value of the firm will be representing the the strike price at which these options are to be exercised. Question 7 1. Implied volatility is the volatility that a. is calculated based on the past data b. is used to calculate the VIX c. is empirically shown to be the same for every option written on the same stock d. equates the Black-Scholes option price with the observed price 10 points Question 8 1. Which of the following statements is correct? a. Trading shares of the underlying stock will not affect either the gamma or the vega of a portfolio b. In a “volatility smile”, all options have the same strike price, but they expire on different dates c. Both of the above d. None of the above 10 points Question 9 1. A two-year zero-coupon bond has a par value 100 and is priced at $80. The annual risk- free interest rate is 3%. Calculate the approximate premium of a put option on the firm’s assets, assuming Merton’s (1974) model. a. 4.5 b. 14.18 c. 20 d. 9.18 Put value = Face value*Exp(-Rate*Time to maturity) -Current price of equity Put value = 100*Exp(-3%*2) -80 Put value = $14.18 Correct option is > c. $14.18 Question 10 1. Which of the Greeks is greater than zero? a. Gamma of the underlying stock b. Delta of a call option c. Elasticity of a put option d. Vega of a futures contract 10 points Question 11 1. In the table below, you see the data on four Wal-Mart call options, recorded on 4/13/20. All options expire May 1, 2020. The price of Wal-Mart stock was $125, and all Black- Scholes prices were calculated under the assumption of 30% volatility. Please fill out the last column. No calculations are required to answer this question. Option Strike Price Black-Scholes Price Implied Volatility Is the observed option premium higher or lower than the Black- Scholes price? 1 115 10.85 38% A 2 120 6.81 31.5% B 3 125 3.73 29.7% C 4 130 1.76 27.3% D a. A = Higher, B = Lower, C = Higher, D = Lower b. A = Lower, B = Lower, C = Higher, D = Higher c. A = Higher, B = Higher, C = Lower, D = Lower d. A = Lower, B = Higher, C = Lower, D = Higher Implied volatility and option premium is directly related which means when implied volatility is higher the option premium would be also higher.