CHAPTER3PRINCIPLESOFOPTIONPRICING-.docVIP

CHAPTER 3: PRINCIPLES OF OPTION PRICING MULTIPLE CHOICE TEST QUESTIONS 1. Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth? a. C + P – X(1 + r)-T b. C – S0 c. P – X d. P + S0 – X(1 + r)-T e. none of the above 2. What is the lowest possible value of a European put? a. Max(0, X – S0) b. X(1 + r)-T c. Max[0, S0 – X(1 + r)-T] d. Max[0, X(1 + r)-T – S0)]