Which of the following statements is false if prices and volatilities are analysed using the Black-Scholes model.
The presence of jumps in the asset price process will increase the prices and implied volatilities for out of the money puts and out of the money calls.
The presence of stochastic volatility will increase the prices and implied volatilities for out of the money puts and calls.
Negative correlation between asset prices and volatility will increase the prices and implied volatilities of out of the money puts and decrease the prices and implied volatilities of out of the money calls.
Positive correlation between asset prices and volatility will increase the prices and implied volatilities of out of the money puts and decrease the prices and implied volatilities of out of the money calls.
Positive correlation between asset prices and volatilities will increase the prices and implied volatilities of in the money puts and decrease the prices and implied volatilities of in the money calls.
Calculate the expected return on a stock over a year if you accept the assumptions behind the Black-Scholes model of option pricing. The stock price is 100, the interest rate is 6%, the dividend yield is 2% and the volatility of the stock return is 20% per annum.
0%
2%
4%
6%
8%
You are analysing a three month at the money spot put option on a stock index with a dividend yield of 2%. If the three-month interest rate is 5% per annum and the annual volatility of the index is estimated at 20%, what is the probability in the Black-Scholes framework that the put option will expire in the money?
47%
49%
50%
51%
53%
Use a two period binomial model to determine the value of the 102.5 American put option on a non-dividend paying stock with a current price of 100. The size of the up step each period is 3.75% and the size of the down step is 1.25%. The actual interest rate for each period is 1.25%.
1.24
1.52
1.86
2.50
2.62
Assume a 3-month European call option strike 105 on a non-dividend paying stock is trading at a price of 2. The price of the stock is 100 and the 3-month money market rate of interest is 5% per annum. What is the fair price of the 105 strike European put?