1.The following information is given about options on the stock of a certain company. S0 = 23 X = 20 rc = 0.09 T = 0.5 s2 = 0.15 No dividends are expected. What value does the Black-Scholes-Merton model predict for the call? (Due to differences in rounding your calculations may be slightly different. “none of the above” should be selected only if your answer is different by more than 10 cents.) a. 5.35 b. 1.10 c. 4.73 d. 6.50 e. none of the above
2. The following information is given about options on the stock of a certain company. S0 = 23 X = 20 rc = 0.09 T = 0.5 s2 = 0.15 No dividends are expected. Use this information to answer questions 1 and 2. Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation? (Due to differences in rounding your calculations may be slightly different. “none of the above” should be selected only if your answer is different by more than 10 shares.) Select one: a. buy 791 shares, sell 1,000 calls b. buy 705 shares, sell 1,000 calls c. sell short 791 shares, buy 1,000 calls d. sell short 705 shares, buy 1,000 calls e. none of the above
3. Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain? Select one: a. the volatility b. the risk-free rate c. the stock price d. the time to expiration e. the exercise price
4.The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions? a. when the number of time periods is large b. when the option is at-the-money c. when the option is in-the-money d. when the option is out-of-the-money e. none of the above
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