Chapter 13 - Option valuation

A call option gives its purchaser:
1. The obligation to buy at a fixed price
2. The obligation to sell at a fixed price
3. The right to buy at a fixed price
4. The right to sell at a fixed price
The difference between American and European options is
1. An American option can be exercised at any date up to the expiry date whilst a European option can ONLY be exercised on the expiry date
2. A European option can be exercised at any date up to the expiry date whilst an American option can ONLY be exercised on the expiry date
3. An American option is to buy whilst a European option is to sell
4. A European option is to buy whilst an American option is to sell
The intrinsic value of a call option is:
1. The difference between the share price today and the price paid for the option
2. The difference between the share price today and the exercise price
3. Positive or negative
4. The share price minus the price paid for the option
Which of the following is NOT a determinant of the time value of an option?
1. The market risk premium
2. The time to the expiry of the option
3. The volatility of the share price
4. The risk free interest rate
Which of the following is NOT an assumption of the Black-Scholes option pricing model?
1. Options are American calls
2. There are no taxes or transaction costs involved in option trading
3. Underlying shares can be short sold
4. There are no dividends payable on the shares before the option expiry date
In order to create a risk free position an investor could
1. Buy a put and a call option
2. Buy a share and a call option
3. Buy a share and a put option
4. Buy a share, a call and a put option
Writing options means:
1. You take on risk for a fixed payment
2. You are not exposed to risk
3. You have limited exposure to risk
4. You must make a profit
The ratio of the change in the market value of an option divided by the change in the value of share is known as:
1. Delta
2. Gamma
3. Theta
4. Vega
A high Gamma value means:
1. The share price is high
2. The market value of the option is particularly sensitive to share price movements
3. It is unlikely that the option will be exercised
4. The price of an option will be low
You have reason to believe that a company's share price could well increase as the result of a contract it is bidding for. Why might you decide to buy options rather than the shares themselves?
1. There is no risk if you buy options
2. It is easier to buy options than shares
3. It is cheaper to buy options than shares
4. It is tax efficient

Chapter 13 - Option valuation

Quiz