1) Consider a 9-month European call option with a strike price of $40 on a stock that sells for $35 today. If the annual risk-free rate (continuously compounded) is 8%, the stock pays no dividends, and the stock's annual volatility is 40%, then the Black-Scholes price for this option (rounded to the nearest cent) is

 

2) An airline knows it will need to buy 100 million barrels of jet fuel 6 months from now. Of course, if the price of jet fuel increases, the airline will be in trouble. Suppose that put and call options on jet fuel are available for purchase.

True or False? To lower the airline's risk associated with changes in jet fuel prices, the airline should purchase call options on jet fuel.

3) A roulette wheel contains the integers 1 through 36, 0, and 00. Suppose that you spin the wheel 6 times and that each time you bet on a single number. What is the probability (rounded to the nearest hundredth) that you win on at least one bet?

 

• 0.09
• 0.11
• 0.13
• 0.15
• None of the above

 

4) Suppose that 1% of all people have a particular disease. A test for the disease is 99% accurate. This means that a person who has the disease has a 99% chance of testing positive for the disease, while a person who doesn't have the disease has a 99% chance of testing negative for the disease.

If a person tests positive for the disease, what is the chance (rounded to the nearest hundredth) that he or she actually has the disease?

 

5) Suppose that you draw two cards from a deck. After drawing the first card, you do not put the first card back in the deck. What is the probability (rounded to the nearest ten thousandth) that both cards are diamonds?