Investment Strategies - Review Questions 17 - 22
- With respect to the binomial option pricing and Black-Scholes option valuation models,
- Both represent alternative methods of valuing any option contract.
- 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.
- These are factor models similar to APT.
- None of the foregoing.
- Factors which impact the pricing of options include all of the following, EXCEPT:
- The Treasury rate on the two year note.
- The underlying stock price.
- The strike price.
- The time to expiration.
- All of the following are features of the Black-Scholes model, except:
- European style option.
- No dividends.
- Known and constant risk-free rate.
- Discrete time pricing model.
- Known and constant volatility.
- Arbitrage Pricing Theory may best be described as:
- An econometric forecasting model.
- A multifactor model used to price equities.
- A pricing model depicted in the Security Market Line.
- None of the above.
- The Security Market Line:
- Is the linear expression of a multifactor model.
- Calculates the risk-adjusted performance of an individual security.
- Plots the inputs of the Capital Asset Pricing Model.
- All of the foregoing.
- 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:
- The option on ΠΧΞ is an inexpensive means of gaining exposure to the actual stock.
- Investors would pay a large premium for this option.
- The $11 premium for this option reflects time value only.
- The $11 premium for this option reflects intrinsic value only.
- a & b.
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