Investment Strategies - Review Questions 23 - 27

  1. Which of the following statements concerning options pricing is correct?
    1. The Black-Scholes model is a discrete time pricing model, whereas the binomial model is referred to as continuous time.
    2. Binomial options pricing starts by considering two possible outcomes and one discrete period with the possibility of both assumptions being relaxed to accommodate actual market scenarios.
    3. Both binomial options pricing and the Black-Scholes models represent an options-specific application of the multi-factor model.
    4. None of the foregoing.
  2. None of the following choices constitute an acceptable use of options, except:
    1. Hedging.
    2. Speculation.
    3. Diversification.
    4. Gaining low cost exposure to the underlying.
    5. Income generation.
    6. None of the foregoing.
  3. Each of the following attributes characterize a low option premium, except:
    1. Close expiration date.
    2. Low stock price and the option is a call.
    3. High stock price and the option is a put.
    4. Deep in-the-money-call.
  4. An option that allows exercise only at expiration is referred to as:
    1. Asian
    2. European
    3. American
    4. Contango
  5. Arrange the following options by premium in ascending order. Assume that the month is September.
    1. January 60 call, underlying trades at 57
    2. October 44 put, underlying trades at 41
    3. July 53 call, underlying trades at 58
    4. April 27 call, underlying trades at 29
    1. IV, I, III, II
    2. I, II, III, IV
    3. I, IV, III, II
    4. I, IV, II, III
    5. II, I, IV, III
Review Answers


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