Volatility smile” is referred to as evidence against the Black-Scholes model. Why is that?   A) Black-Scholes model assumes that different options on a given stock have different values for implied volatility   b.) Volatility of returns on one and the same stock, over one and the same future period of time, can only take one value   C) Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used

Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock.

Higher interest rates imply higher required rates of return, which is generally a negative for stock prices a. True b. False

In equilibrium, we assume that a stock's price does not equal its intrinsic value. Group of answer choices True False

The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases. Select one: True False

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

Explain how the portfolio approach to investment allows the reduction of risk and why Beta therefore is the most appropriate measure of stock risk?

Which of the following is correct with regards to Theories of Term Structure?   When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.

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.