Table of Contents
CFA Level 2 – Derivative Investments, Session 17-Reading 62
Option Markets and Contracts-LOS d
(Practice Questions, Sample Questions)
1. The value of a put option is positively related to all of the following EXCEPT:
A) time to maturity.
B) exercise price.
C) risk-free rate.
Explanation — (C) The value of a put option is negatively related to increases in the risk-free rate
2. The value of a European call option on an asset with no cash flows is positively related to all of the following EXCEPT:
A) exercise price.
B) time to exercise.
C) risk-free rate
Explanation — (A) The value of a call option decreases as the exercise price increases
3. Which of the following option sensitivities measures the change in the price of the option with respect to a decrease in the time to expiration?
A) Gamma.
B) Theta.
C) Delta
Explanation — (B) Theta describes the change in option price in response to the passage of time. Since option holders would prefer that value not decay too quickly, an option with a low theta value is desirable
4. For a change in which of the following inputs into the Black-Scholes-Merton option pricing model will the direction of the change in a put’s value and the direction of the change in a call’s value be the same?
A) Volatility.
B) Exercise price.
C) Risk-free rate
Explanation — (A) A decrease/increase in the volatility of the price of the underlying asset will decrease/increase both put values and call values. A change in the values of the other inputs will have opposite effects on the values of puts and calls
