1. Why do higher interest rates lead to higher call option values?

2. Explain what is meant by put-call parity.

3. Call values are directly related to the underlying stocks volatility,

yet higher volatility means that the stock price can go much lower

as well as higher. How would you resolve this apparent paradox?

4. What does it mean to assert that the delta of a call option is 0.70?

How can a short position in 1,000 call options be made delta?

neutral when the delta of each option is 0.7?

5. Explain why the value of a call option increases with time to

expiration?

6. Explain how an options delta/gamma and a bonds duration/convexity are similar.

7. Suppose you own an American call option on a stock that does not

pay common dividends. The call option has one month until

expiration. Under what circumstances would you exercise this

call option early?

8. What is the most critical variable in the Black-Scholes model?

Explain.