6. The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European. (a) True (b) False 7. A portfolio that combines the underlying stock and a short position in an option is called a) a ratio portfolio d) a hedge portfolio b) e) a risk arbitrage portfolio none of the above c) a two-state portfolio 8. In a binomial model, if the call price in the market is higher than the call price given by the model, you should a) none of the above b) buy the call and sell short the stock c)buy the call and buy the stock d) sell the call and sell short the stock buy the stock and sell the call e) 9. The values of u and d are which of the following? a) the return on the stock if it goes up and down, respectively b) one plus the return on the stock if it goes up and down, respectively c) the inverse of the ratio of the up and down probabilities, respectively, and the risk-free rate d) none of the above e)the normal probabilities of up and down movements, respectively 10. If the stock pays a specific dollar dividend and the stock price, to include the dividend, follows the binomial up and down factors, which of the following will happen? d) the binomial tree will not recombine none of the above a) an arbitrage profit will not be possible b) c) the option will be mispriced e) the binomial tree will recombine

6. The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European. (a) True (b) False 7. A portfolio that combines the underlying stock and a short position in an option is called a) a ratio portfolio d) a hedge portfolio b) e) a risk arbitrage portfolio none of the above c) a two-state portfolio 8. In a binomial model, if the call price in the market is higher than the call price given by the model, you should a) none of the above b) buy the call and sell short the stock c)buy the call and buy the stock d) sell the call and sell short the stock buy the stock and sell the call e) 9. The values of u and d are which of the following? a) the return on the stock if it goes up and down, respectively b) one plus the return on the stock if it goes up and down, respectively c) the inverse of the ratio of the up and down probabilities, respectively, and the risk-free rate d) none of the above e)the normal probabilities of up and down movements, respectively 10. If the stock pays a specific dollar dividend and the stock price, to include the dividend, follows the binomial up and down factors, which of the following will happen? d) the binomial tree will not recombine none of the above a) an arbitrage profit will not be possible b) c) the option will be mispriced e) the binomial tree will recombine

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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D4)
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