Derivatives

Pricing and Valuation of Options practice questions

Pricing and Valuation of Options is part of CFA Level I Derivatives. Derivatives questions cover forwards, futures, swaps, options, replication logic, payoffs, and risk-transfer mechanics. Use this page to review the controlling ideas, then work through 8 questions with answer explanations and common traps.

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Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

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Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

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Easy

Derivatives

Pricing and Valuation of Options

Holding all other factors constant, an increase in the risk-free interest rate most likely results in:

Moderate

Derivatives

Pricing and Valuation of Options

Prior to expiration, the maximum possible value of a European put option is most accurately described as:

Moderate

Derivatives

Pricing and Valuation of Options

For options written on a stock that pays no dividends, early exercise is most likely to be rational for the holder of:

Easy

Derivatives

Pricing and Valuation of Options

As an option's expiration date approaches, with all other factors unchanged, the time value component of the option's price most likely:

Moderate

Derivatives

Pricing and Valuation of Options

A European put option with an exercise price of USD 75.00 trades at a price of USD 6.20 when the underlying stock trades at USD 71.00. The put's exercise value and time value are, respectively, closest to:

Moderate

Derivatives

Pricing and Valuation of Options

A non-dividend-paying stock trades at USD 64.00. A one-year European call option on the stock has an exercise price of USD 60.00, and the annual risk-free rate is 4.00%. The lower bound on the call option's value is closest to:

Difficult

Derivatives

Pricing and Valuation of Options

A non-dividend-paying stock trades at USD 45.00. A six-month European put option on the stock has an exercise price of USD 50.00, and the annual risk-free rate is 5.00%. The lower bound on the put option's value is closest to:

Difficult

Derivatives

Pricing and Valuation of Options

An investor writes a European call option with an exercise price of USD 90.00 and receives a premium of USD 5.60 per share. At expiration, the underlying stock trades at USD 97.00. Ignoring transaction costs, the writer's profit per share and the breakeven underlying price at expiration are, respectively, closest to: