Income that is eventually derived from the qualified stock option (QSO) is determined to be ordinary income if the receipt exercises the option to buy the underlying securities and subsequently sells the securities within 12 months. To get a tax break:
A. The owner must hold the shares for at least one year
B. The reader should consult a tax advisor regarding any possible tax consequences
C. Business valuation professional is to estimate the fair market value
D. The ISO must have been granted at least two years before the stock is sold
In creating employee stock options, the issuing company usually endeavors to set the option's strike price at the fair market value of the underlying shares. When the strike price is set at the fair market value, the intrinsic value is ________, and the only value of the option is its __________.
A. One Value, market value
B. Zero value, time value
C. Current market value, zero value
D. Par value, zero value
The advantages of the binomial model over the Black-Scholes model and its variations include:
A. The binomial model's ability to incorporate a variety of conditions which can increase accuracy, including variations in expected volatility, dividends rates and risk-free discount rates as well as transaction costs.
B. The binomial model can be quite useful for valuing employee stock options as it is possible to include potential dilution, blackout periods, delayed vesting provisions, early exercise patterns and employee turnover in the model by increasing the number of periods and adjusting the option values at each node.
C. Binomial model does not require more computations
D. Binomial Model does not have any liquidity problem
Fisher Black developed a technique to value American stock options using the Black- Scholes model called the pseudo-American call option model. The steps in the method are as follows EXCEPT:
A. Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option
B. For each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option
C. Select the European option with the highest value as the value of the American option
D. Using the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.
_________________ is computed by reverse re-engineering the price of a publicly traded option on the same underlying stock. This is the one when used in the Black-Scholes model along with the other four known variables results in a calculated value that matches the market price of the publicly traded options.
A. Implied price volatility
B. Volatility of closely held companies
C. Historical price volatility
D. Both A and C
Calculating the volatility of the underlying stock is more complicated. Volatility is the standard deviation is the price of underlying stock. The volatility used in the Black Scholes model is the total volatility of the underlying stock's price. It is not its bets, which measures
A. The relative movement of the stock's price to the market
B. That the stock's price changes are relatively constant
C. Implied volatility
D. The number of outstanding shares of the issuer
A seller who does not own a security (a short seller) will simply accept price of the security
from the buyer and agree to settle with the buyer on some future date by paying him an amount equal to
the price of the security on that date. While this short sale is outstanding, the short seller will have the use,
of, or interest on, the proceeds of the sale. This is the assumption of:
A. An option market
B. Market of underlying stock in an option trading
C. Near-perfect market
D. Volatile market
The Black-Scholes model assumes near perfect markets for both the options and the underlying stock. Among other conditions, the model assumes the following EXCEPT:
A. There are no commissions or other transaction costs in buying or selling the stock or the option
B. The short-term risk-free rate is known and is constant through time
C. Trading never stops. It is continuous through time following a geometric Brownian motion
D. The stock price does not follow a random walk with a long normal distribution
Which of the following is NOT out of the call option's value?
A. The price of underlying stock
B. The risk bearing interest rate
C. The dividends expected during the life of the option
D. The volatility of the price of the underlying stock
Options can be very complicated. For example, some options have strike pries that vary over time or under different market conditions. Other options have lives that vary depending on stock prices and market conditions. There are even _________________, which are options on option, and ______________, which set price boundaries.
A. Strike, barrier option
B. Risk free options, barrier options
C. Compound options, barrier options
D. Compound options, volatile options
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