GROUP 14 – OPTIONS PRICING MODEL (BLOCK 3)

1. Which of the following are not the one who makes options price?
a. Market Participants
b. Individual and Institutional Investors
c. Market-makers
d. None of the above
2. What do you call the basic economic fact that an option ultimately worth?
a. Options market
b. Market Equilibrium
c. Supply and Demand
d. Pricing Models
3. Which of the following statements is the purpose of an option except,
a. Long and short positions on calls and puts cannot be combined in many different
ways to serve different purposes.
b. Since options give the right but not obligation to exercise, investors can use options to
speculate while also reducing downside losses.
c. Options are used for both hedging and speculating purposes.
d. None of the above
4. What option will allow you to use if the stock tanks down its current market value of 120 per
share, the strike price was 150 per share and it expires within 30 days?
a. Call Option
b. Put Option
c. Option
d. Options Pricing model
5. What option will allow you to use if the current market value is 150 per share within the next 30
days and you have a strike price of 140?
a. Call option
b. Put option
c. Option
d. Option Pricing Model
6. Which of the following components of an option contract that states how much is this option
going to cost?
a. Underlying asset
b. Option Premium
c. Strike Price
d. Type of Delivery
7. Statement 1: American Option can only be used on the day it expires.
Statement 2: European Option can be used up until its expiration date over a period of time.
a. Statement 1 is true, Statement 2 is false
b. Statement 1 is false, Statement 2 is true
c. Both statement is false
d. Both statement is true
8. Which the following that describes the relationship between an option price and the price of the
underlying asset?
a. Ticker
b. Contract Size
c. Delta
 d. Exercise
9. What does it mean that if the delta has a negative result?
a. If the stock goes down by a dollar the options price is going to fall by certain number of
units
b. If the stock goes down by a dollar the options price going to rise by a certain number of
units
c. If the stock goes up by a dollar the options price going to rise by a certain number of units
d. If the stock goes up by a dollar the options price is going to fall by a certain number
of units
10. Which of the following theoretical value or model that quantifies the possibility of buying and
selling assets as if there were a single probability for everything in the market?
a. Risk- Neutral Probability
b. Black-Scholes model
c. Binomial Option Pricing Model
d. Monte- Carlo Simulation
Use the following information for the next two questions:
A stock price is currently $50. It is known that at the end of 1 month it will be either $53 or $48. The
risk-free interest rate is 10% per annum with continuous compounding.
11. What is the value if a 6-month European call option with a strike price of $45?
a. 7.1956
b. 7.1846
c. 7.1946
d. 7.1834

12. What is the probability of upward movement? 4 decimal places

a. 0.9217
b. 0.9127
c. 0.9122
d. 0.9324

Solution
So = $50;
So u= $53
So u= $53;

So d=$48 So = $50
r= 10%
K=$45 So d=$48

T= 6 months = 1/2 year.

e rT −d
P=
u−d
 S o u 53
u= = =1.06
So 50
So d 48
d= = =0.96
S o 50

1
0.10( )
2
e −0.96
P= =0.9127
1.06−0.96
1−P
1−0.9127=0.0873

f u=Max ( S t −K , 0 )=Max ( 53−45,0 )=$ 8

f d =Max ( S t−K , 0 ) =Max ( 48−45,0 )=$ 3

−rT
f =[P f u+ (1−P ) f d ]e
−0.10 x1 /2
f =[0.9127 x 8+0.0873 x 3] e

f =$7.1946

Use the following information for the next three questions:

A stock price is currently $200. Over each of the next two 6-month periods it is expected to go up by
20% or down by 20%. The risk-free interest rate is 15% per annum with continuous compounding.
13. What is the value of a 1-Year American call option with a strike price of $200?
a. 7.9691
b. 7.9991
c. 7.9692
d. 7.9891

14. What is the value f uin 1-Year American Call option?

a. 0.7653
b. 0.7553
c. 0.7754
d. 0.7852

15. What is the value of f d in 1- Year American Call option?

a. 23
b. 32
 c. 20
d. 51

Solution:

u= $264

u= $240
ud= $198
= $200

f d=$180
dd= $162

f uu=Max (200−264,0 ) = $0

f ud=Max ( 200−198 , 0 ) = $2

f dd=Max ( 200−162, 0 ) = $38

Given
So = $200; P u= $264

Price = ± $ 20 % ;
r= 15% u= $240
n= 2(each of 6 month)
K=$200 99 1-P ud= $198

T= 6 months = 0.5 year

99

Probability of Upwards and Downward movement

S o u 240
u= = =1.2
So 200
 So d 180
d= = =0.9
S o 200

e 0.15 x 0.5 −0.9

P= =0.5929
1.2−0.9
1−P=1−0.5929=0.4071

Find the value using Discount back process

−rT
f u=(P f uu + ( 1−P ) f ud ) e
−0.15× 0.5
f u=( 0.5929× 0+0.4071 ×2) e
f u=$ 0.7553

Calculate the Future Outcome

f u=Max ( S T −K , 0.7553 )

f u=Max ( 200−240 , $ 0.7553 )

f u=Max (−40 , $ 0.0 .7553 )

f u=$ 0.7553

−rT
f d =( P f ud + (1−P ) f dd )e
−0.15 x 0.5
f d =(0.5929 ×2+0.4071 x 38) e
P ud=198
f d =$ 15.4521 $264

d= $180
f d =Max ( K −S t , 0 )

f d =Max ( 200−180 , $ 15.4521 )

99 dd= $162
1-P
f d =Max ( 20 , $ 15.4521 )

f d =$ 20
99
 u= $240

=7553
= $200

f=$7.9691 d=$180

f =( P f u+ ( 1−P ) f d ) e−rT

f =(0.5929× 0.7553+0.4071 ×20)e−0.15 x 0.5

f =$7.9691

16. One of the applications of Monte Carlo Simulation except?

a. Expanding the Possible Scenario
b. Sensitivity Testing
c. Incorporate probability
d. Reducing Complexity

17. If K is greater than St what type of trade system is that in BOPM?

a. Put Option
b. American Style option
c. Call option
d. European Style option

18. This is the process of examining the world as a system?

a. Monte Carlo Stimulation
b. Binomial Pricing Model
c. European Call Option
d. Monte Carlo Simulation

19. This model requires that there be two possible stock prices at the expiration date and a
probability for each price
a. Black Scholes Model
b. Monte Carlo Simulation
c. Papansin Model
d. Binomial Option Pricing Model

20. What model will allow you to use a mathematical formula to figure out what things are worth
and/or theoretical value of an option?
a. Black-Scholes Model
b. Options Pricing Model
c. Binomial Option Pricing Model
d. Monte- Carlo Simulation
21. It is a mathematical formula that returns the fair price of a European stock option.
a. Binomial Pricing model
b. Black-Scholes Model
c. Monte-Carlo
d. None of the above

22. It is a measure of how much the security prices will move in the subsequent periods.
a. Dividend yield
b. Risk-free interest rate
c. Volatility
d. Strike price

23. The risk-adjusted probability of receiving the stock at the expiration of the option contingent
upon the option finishing in the money.
a. D1
b. D2
c. N(d1)
d. N(d2)

24. The following are the assumptions in Black-Scholes model except

a. Stock returns are not normally distributed
b. Volatility is constant over time
c. Stocks do not pay dividends
d. Risk-free interest rate doesn’t fluctuate over time

25. In what year did Robert C. Merton and Myron Scholes win the Nobel Memorial Prize in
Economic Studies?
a. 1977
b. 1973
c. 1997
d. 1999

26. In the Black and Scholes option pricing formula, an increase in a stock's volatility:
a. Increases the associated call option value
b. Decreases the associated put option value
c. Increases or decreases the option value, depending on the level of interest rates
d. Does not change either the put or call option value because put-call parity holds

27. An American option is more valuable than a European option on the same dividend-paying
stock with the same terms because the:
a. European options do not conform to the Black and Scholes model and are often mispriced
b. Dividend will be in USD and this is a more universally acceptable currency than the EUR
 c. American option can be exercised from date of purchase until expiration, but the
European option can be exercised only at expiration
d. European option contract is not adjusted for stock splits and stock dividends

28. The Black-Scholes-Merton model is used for European option pricing only.
a. True
b. False
c. Neither true nor false
d. –

Use the following information for the next two questions:

The current price of a continuous-dividend paying stock is observed to be $50 per share while its
volatility is given to be 0.34. The continuously compounded, risk-free interest rate is 0.05. Consider a
European call option with the strike price equal to $40 and the exercise date in three months.

29. What is the value of d1?

a. 1.44
 b. 1.30
c. 0.44
d. 1.5

30. Using the Black-Scholes pricing formula, find the value of call option?
a. $9.08
b. $9.80
c. $10.55
d. $14.10