Hull:Options,FuturesandOtherDerivatives,NinthEditionChapter15:TheBlack-Scholes-MertonModelMultipleChoiceTestBank:QuestionswithAnswers1.WhichofthefollowingisassumedbytheBlack-Scholes-Mertonmodel?A.ThereturnfromthestockinashortperiodoftimeislognormalB.ThestockpriceatafuturetimeislognormalC.ThestockpriceatafuturetimeisnormalD.NoneoftheaboveAnswer:BBlack-Scholes-Mertonassumesthatthereturnfromastockinashortperiodoftimeisnormallydistributed.Thismeansthatthestockpriceatafuturetimeislognormallydistributed.2.TheoriginalBlack-ScholesandMertonpapersonstockoptionpricingwerepublishedinwhichyear?A.1983B.1984C.1974D.1973Answer:DThecorrectansweris1973.Bycoincidencethisisalsotheyearthatorganizedtradingincalloptionsstarted.Putoptiontradingstartedafewyearslater.3.WhichofthefollowingisadefinitionofvolatilityA.Thestandarddeviationofthereturn,measuredwithcontinuouscompounding,inoneyearB.Thevarianceofthereturn,measuredwithcontinuouscompounding,inoneyearC.ThestandarddeviationofthestockpriceinoneyearD.ThevarianceofthestockpriceinoneyearAnswer:AVolatilitywhenmultipliedbythesquarerootoftisthestandarddeviationofthereturninashortperiodoftimeoflengtht.Itisalsothestandarddeviationofthecontinuouslycompoundedreturninoneyear.4.Astockpriceis$100.Volatilityisestimatedtobe20%peryear.Whatisanestimateofthestandarddeviationofthechangeinthestockpriceinoneweek?A.$0.38B.$2.77C.$3.02D.$0.76Answer:BTheestimateis5.WhatdoesN(x)denote?A.TheareaunderanormaldistributionfromzerotoxB.TheareaunderanormaldistributionuptoxC.TheareaunderanormaldistributionbeyondxD.Theareaunderthenormaldistributionbetween-xandxAnswer:BThenormaldistributionrunsfromminusinfinitytoplusinfinity.N(x)istheareaunderthedistributionbetweenminusinfinityandx.6.Whichofthefollowingistrueforaone-yearcalloptiononastockthatpaysdividendseverythreemonths?A.ItisneveroptimaltoexercisetheoptionearlyB.ItcanbeoptimaltoexercisetheoptionatanytimeC.Itisonlyeveroptimaltoexercisetheoptionimmediatelyafteranex-dividenddateD.NoneoftheaboveAnswer:DWhentherearediv...
