Chapter 13 Valuing Stock Options: The BSM Model

1) Which of the following is assumed by the Black-Scholes-Merton model?

A) The return from the stock in a short period of time is lognormal

B) The stock price at a future time is lognormal

C) The stock price at a future time is normal

D) None of the above

2) The original Black-Scholes and Merton papers on stock option pricing were published in which year?

A) 1983

B) 1984

C) 1974

D) 1973

3) Which of the following is a definition of volatility?

A) The standard deviation of the return, measured with continuous compounding, in one year

B) The variance of the return, measured with continuous compounding, in one year

C) The standard deviation of the stock price in one year

D) The variance of the stock price in one year

4) A stock price is $100. Volatility is estimated to be 20% per year. What is an estimate of the standard deviation of the change in the stock price in one week?

A) $0.38

B) $2.77

C) $3.02

D) $0.76

5) What does N(x) denote?

A) The area under a normal distribution from zero to x

B) The area under a normal distribution up to x

C) The area under a normal distribution beyond x

D) The area under the normal distribution between -x and x

6) Which of the following is true when there are dividends?

A) It is never optimal to exercise a call option on the stock early

B) It can be optimal to exercise a call option at any time

C) It is only ever optimal to exercise a call option immediately after an ex-dividend date

D) None of the above

7) What is the number of trading days in a year usually assumed for equities?

A) 365

B) 252

C) 262

D) 272