Chapter 8

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1. Which of the following statements is CORRECT?
,e. An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.

2. Which of the following statements is CORRECT?
b. Call options generally sell at a price less than their exercise value. c. If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.

3. Which of the following statements is CORRECT?
d. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.

4. The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value? c. $2.99

5. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data: The price of the stock is $40.
The strike price of the option is $40.
The option matures in 3 months (t = 0.25).
The standard deviation of the stock’s returns is 0.40, and the variance is 0.16. The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model: d1 = 0.175
d2 = -0.025
N(d1) = 0.56946
N(d2) = 0.49003

N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option? c. $3.47
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