Question

Which of the following statements is correct?

a. A firm’s equity is similar to a call option with the value of the preferred stock being the strike price.

b. Someone who buys a straddle position is anticipating that the stock will experience significant price changes.

c. Buying a put can be considered to be a form of life insurance.

d. Price volatility is not a major factor in valuing options.

e. The maximum value a long put can take is the stock price.

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Which of the following statements is not correct?

a. The binomial option pricing model when taken to the limit becomes the Black-Scholes option pricing model.

b. The Black-Scholes model uses a continuous time discount factor.

c. The binomial option pricing model use a ratio of the range values as the hedge ratio.

d. The Black-Scholes model is related to a heat transfer equation and Brownian molecular motion.

e. The Black Scholes model only estimates the intrinsic value of the call option.

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Which of the following statements is not correct?

a. Being short a call requires the obligation to sell a stock at a certain price.

b. Buying a put gives you the right to sell a stock at a certain price.

c. Options can never be worth less than zero.

d. Selling a put gives you the right to buy a stock at a certain price.

e. Being long a call gives you the right to buy a stock at the exercise price.

Answer 1

Sol:

1.option c

Reason : Put generally bought when investor think price will go down but its used for hedging purpose of long call position as protective put.

2. Option e

Reason : Black-Scholes model can calculate the current stock price , the intrinsic value of the stock , volatility , time to expiration , dividends paid and interest rate not only intrinsic value of stock.

3.option d

Reason : selling put give trader a obligation to buy stock at certain price . Other options are correct.