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CA Final Option (Finance) — practice questions — page 2

Explore 69 free Option (Finance) questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Option (Finance) questions and exercises with answers

Showing questions 31–60 of 69.

Which portfolio matches a long call plus a short put at the same strike?Read the answer and worked solution →The argument behind put-call parity rests on the absence of what?Read the answer and worked solution →Without dividends, how do implied volatilities of calls and puts compare?Read the answer and worked solution →Put-call parity holds exactly only in which kind of market?Read the answer and worked solution →The Black–Scholes formula gives a theoretical price for which options?Read the answer and worked solution →What is the main principle behind the Black–Scholes model?Read the answer and worked solution →Which is an assumption of the Black–Scholes model?Read the answer and worked solution →How does Black–Scholes assume the stock price moves?Read the answer and worked solution →What does the basic Black–Scholes model assume about dividends?Read the answer and worked solution →Which Black–Scholes input cannot be directly observed in the market?Read the answer and worked solution →What is implied volatility?Read the answer and worked solution →Who received the 1997 Nobel Memorial Prize for the option pricing work?Read the answer and worked solution →Whose 1900 thesis first applied Brownian motion to derivative pricing?Read the answer and worked solution →Why can Black–Scholes not be applied directly to bonds?Read the answer and worked solution →The model's weakness about extreme price moves leads to what risk?Read the answer and worked solution →Gap risk from continuous trading assumptions is hedged how?Read the answer and worked solution →Which model may be used when the underlying price can be negative?Read the answer and worked solution →The binomial options pricing model is what kind of model?Read the answer and worked solution →Why is the binomial model widely used for American options?Read the answer and worked solution →In the binomial method, where does valuation start?Read the answer and worked solution →With early exercise allowed, the model compares binomial and exercise values and takes which?Read the answer and worked solution →Which method is commonly preferred for options with complicated features such as Asian options?Read the answer and worked solution →A stock at Rs 100 can move to Rs 120 or Rs 80 in one step, and the rate is zero. What is a call of strike Rs 100 worth?Read the answer and worked solution →Which set lists the most common first-order Greeks?Read the answer and worked solution →Delta of a long call vanilla option lies in which range?Read the answer and worked solution →A long put has delta in which range?Read the answer and worked solution →A trader holds 50 call contracts of 100 shares each, each with delta 0.6. The position acts like how many shares?Read the answer and worked solution →A call has delta 0.65 and no dividends exist. What is the delta of the same-strike put?Read the answer and worked solution →An out-of-the-money call has delta 0.15. What does a trader estimate?Read the answer and worked solution →Which Greek measures sensitivity of option value to volatility?Read the answer and worked solution →

Worked practice questions

Which portfolio matches a long call plus a short put at the same strike?

  1. Short share, lend K
  2. Long share, lend K
  3. Long put and long stock
  4. Long share, borrow K
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Correct answer: D. Long share, borrow K

Both portfolios pay S(T) minus K at expiry, so they must cost the same without arbitrage.

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The argument behind put-call parity rests on the absence of what?

  1. Arbitrage opportunities
  2. Dividend payments
  3. Transaction taxes
  4. Exchange regulation
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Correct answer: A. Arbitrage opportunities

Identical payoffs must have identical prices, otherwise a riskless profit could be locked in.

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Without dividends, how do implied volatilities of calls and puts compare?

  1. Calls are always higher
  2. They must be identical
  3. Puts are always higher
  4. They are unrelated
Show answer and solution

Correct answer: B. They must be identical

Parity ties call and put prices together, so their implied volatility must be the same when there are no carry costs.

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