QUESTION: 125

A seller who does not own a security (a short seller) will simply accept price of the security from the buyer and agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date. While this short sale is outstanding, the short seller will have the use, of, or interest on, the proceeds of the sale. This is the assumption of:

An option market
Market of underlying stock in an option trading
Near-perfect market
Volatile market

Answer(s): C

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QUESTION: 126

Calculating the volatility of the underlying stock is more complicated. Volatility is the standard deviation is the price of underlying stock. The volatility used in the Black Scholes model is the total volatility of the underlying stock’s price. It is not its bets, which measures

The relative movement of the stock‘s price to the market
That the stock’s price changes are relatively constant
Implied volatility
The number of outstanding shares of the issuer

Answer(s): A

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QUESTION: 127

___________ is computed by reverse re-engineering the price of a publicly traded option on the same underlying stock. This is the one when used in the Black-Scholes model along with the other four known variables results in a calculated value that matches the market price of the publicly traded options.

Implied price volatility
Volatility of closely held companies
Historical price volatility
Both A & C

Answer(s): A

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QUESTION: 128

Fisher Black developed a technique to value American stock options using the Black- Scholes model called the pseudo-American call option model. The steps in the method are as follows EXCEPT:

Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option
For each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option
Select the European option with the highest value as the value of the American option
Using the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.

Answer(s): D

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QUESTION: 125

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QUESTION: 128