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# Black and Scholes and Binomial Model - MULTIPLE CHOICE

1) An investor is speculating with a long call position what is the most likely preference of the investor relative to a change of the rho?

A - Increase
B - Stay constant
C - Indifferent

2) The binomial price will theoretically equal the Black and Scholes price under which of the following condition?

1. when the option is out-of-the-money
2. when the option is at-the-money
3. when the option is in-the-money
4. when the number of time periods is large

3) What will happen when the volatility is 0 in the Black and Scholes model ?

!. the option price converges to the intrinsic value
2. the option price converges to either zero or the lower bound
3. none are correct
4. the option automatically expires out of the money

4) The stock price is \$23, the risk-free rate is 95, variance is 15%, exercise price is \$20 and time to expiration is .5. No dividends are expected. To construct a riskless hedge, the number of puts per 100 shares purchased is

A. 758
B. 233
C. 342
D. -80

5) Which of the following statements about the delta is not true?

A. none are correct
B. it converges to zero or one at expiration
C. it ranges from zero to one
D. it changes slowly near expiration if the option is at-the-money

#### Solution Preview

1) An investor is speculating with a long call position what is the most likely preference of the investor relative to a change of the rho?

A - Increase
B - Stay constant
C - Indifferent

An increase in interest rate increases the value of the call option.
Rho is the rate of change of option price with respect to a change in interest rate.
A higher rho will give higher profits for a person holding the long call position.

2) The binomial price will theoretically equal the Black and Scholes price under which of the following condition?

1. when the option is out-of-the-money
2. when the option is at-the-money
3. when the option is in-the-money
4. when the number of time periods is large

Answer: 4. when the number of time periods is large

The binomial model converges on the Black-Scholes formula as the number of binomial calculation steps increases

3) What will happen when ...

#### Solution Summary

Answers MCQ on Black Scholes And Binomial model of Option valuation

\$2.19