Select all that are true with respect to the Black Scholes Option Pricing Model (BSOPM) Group of answer choices   When using BSOPM to value a stock option, the BSOPM assumes that stock prices follow a normal distribution. When using BSOPM to value a stock option, the BSOPM assumes that stock returns follow a normal distribution. Half of the observations in a normal distribution are above the mean and half are below the mean. Fisher Black and Myron Scholes were awarded the Nobel Prize in 1997 for their work in Option Pricing.

4. Answer the following questions on exotic options: (a) Discuss the differences between a combination and a spread when constructing portfolios of options. (b) Define a long strangle and represent the profit function. (c) Design a forward contract on a stock with a particular delivery price and delivery date as a combination of options on the same underlying asset.

If markets are efficient then: All stocks will have the same expected returns All stocks will have the same risk Two stocks will the same volatility will have the same expected returns Two stocks with the same priced risks will have the same expected returns

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The Black–Scholes option pricing model (OPM) was developed in 1973. The creation of the Black–Scholes OPM played a significant role in the rapid growth of options trading.   The derivation of the Black–Scholes Option Pricing Model rests on the concept of a    riskless hedge or leveraged buyout   According to the Black–Scholes Option Pricing Model, as the variance, σ2σ2, increases, the value of the call option increase or decrease   Happy Orange Storage Company has a current stock price of $28.00. A call option on this stock has an exercise price of $28.00 and 0.25 year to maturity. The variance of the stock price is 0.09, and the risk-free rate is 6%. You calculate d₁ to be 0.18 and N(0.18) to be 0.5714. Therefore, d₂ will be 0.03 and N(0.03) will be 0.5120. Using the Black–Scholes Option Pricing Model, what is the value of the option? (Note: Use 2.7183 as the approximate value of e.) $1.877   $1.408   $1.971   $1.689

Using the Black-Scholes option pricing formula to determine how many of the following statements are false:              [I]         The higher the dividend payout, the cheaper the put option, all else equal            [II]         The put value decreases with volatility, all else equal          [III]         The lower the current stock price, the cheaper the put option, all else equal

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Explain in your own words what dynamic hedging is, and how a trader could profit by dynamically hedging an option if they have a forecast of volatility that is different to implied volatility.

Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity.       2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option.       3. When the exercise price increases, option prices increase.       4. As the risk-free rate increases, the value of the option increases.

Identify the key parameters that influence option price. Discuss the impact of a rise and fall in the value of each parameter on the prices of put and call options.