Investment Strategies - Review Questions 17 - 22

  1. With respect to the binomial option pricing and Black-Scholes option valuation models,
    1. Both represent alternative methods of valuing any option contract.
    2. Whereas the binomial model lends itself to the valuation of American style options, Black-Scholes is better suited to the pricing of European style options.
    3. These are factor models similar to APT.
    4. None of the foregoing.
  2. Factors which impact the pricing of options include all of the following, EXCEPT:
    1. Volatility.
    2. The Treasury rate on the two year note.
    3. The underlying stock price.
    4. The strike price.
    5. The time to expiration.
  3. All of the following are features of the Black-Scholes model, except:
    1. European style option.
    2. No dividends.
    3. Known and constant risk-free rate.
    4. Discrete time pricing model.
    5. Known and constant volatility.
  4. Arbitrage Pricing Theory may best be described as:
    1. An econometric forecasting model.
    2. A multifactor model used to price equities.
    3. A pricing model depicted in the Security Market Line.
    4. None of the above.
  5. The Security Market Line:
    1. Is the linear expression of a multifactor model.
    2. Calculates the risk-adjusted performance of an individual security.
    3. Plots the inputs of the Capital Asset Pricing Model.
    4. All of the foregoing.
  6. Call options on ΠΧΞ Corporation with seven months to expiry have a strike price of 17. The share price has been erratic and currently trades at approximately $25.58. From the foregoing, one would infer that:
    1. The option on ΠΧΞ is an inexpensive means of gaining exposure to the actual stock.
    2. Investors would pay a large premium for this option.
    3. The $11 premium for this option reflects time value only.
    4. The $11 premium for this option reflects intrinsic value only.
    5. a & b.
Review Questions 23 - 27
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