Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 10: 10: Mechanics of Options Markets Markets Multiple Choice Test ank: !uestions "ith #ns"ers 1. Which Which of the follow following ing describ describes es a call call option? option? A. The right right to to buy an asset asset for a certain certain price price B. The obligat obligation ion to buy buy an asset asset for a certain certain price price C. The right right to to sell an an asset asset for a certai certain n price price D. The obligat obligation ion to sell sell an asset asset for a certain certain price Answer: A A call option is the right, but not the obligation to buy. . Which Which A. B. C. D.
of of the foll follow owing ing is is true? true? A long long call call is the sa!e sa!e as a short short put put A short short call call is the sa!e sa!e as a long long put A call on on a stoc" stoc" plus plus a stoc" stoc" the sa!e sa!e as a put #one #one of of the the abo$ abo$e e
Answer: D #one of the state!ents are true. %ong calls, short calls, long puts, and short puts all ha$e di&erent payo&s as indicated by 'igure 1(.). A put on a stoc" plus the stoc" pro$ides a payo& that is si!ilar to a call, as e*plained in Chapters 11 and 1. But a call on a stoc" plus a stoc" does not pro$ide a si!ilar payo& to a put. +. An in$estor in$estor has e*changetr e*changetraded aded put options options to sell 1(( shares for -(. There is a for 1 stoc" split. Which of the following is the position of the in$estor after the stoc" split? A. ut optio options ns to sell sell 1(( 1(( shares shares for -( -( B. ut optio options ns to sell sell 1(( 1(( shares shares for -1( -1( C. ut optio options ns to sell sell (( (( shares shares for -1( -1( D. ut option options s to sell sell (( shares shares for for -( Answer: C When there is a stoc" split the nu!ber of shares increases and the stri"e price decreases. /n this case, because it is a for 1 stoc" split, the nu!ber of shares doubles and the stri"e price hal$es. 0. An in$estor in$estor has e*changetr e*changetraded aded put options options to sell 1(( shares for -(. There is ) stoc" di$idend. Which of the following is the position of the in$estor after the stoc" di$idend? A. ut optio options ns to sell sell 1(( 1(( shares shares for -( -( B. ut optio options ns to sell 2) shar shares es for -) C. ut optio options ns to sell sell 1) 1) shares shares for -1) -1) D. ut option options s to sell sell 1) shares shares for for -13
Answer: D The stoc" di$idend is e4ui$alent to a ) for 0 stoc" split. The nu!ber of shares goes up by ) and the stri"e price is reduced to 05) of its pre$ious $alue. ). An in$estor has e*changetraded put options to sell 1(( shares for -(. There is a -1 cash di$idend. Which of the following is then the position of the in$estor? A. The in$estor has put options to sell 1(( shares for -( B. The in$estor has put options to sell 1(( shares for -16 C. The in$estor has put options to sell 1() shares for -16 D. The in$estor has put options to sell 1() shares for -16.() Answer: A Cash di$idends unless they are unusually large ha$e no e&ect on the ter!s of an option.
3. Which A. B. C. D.
of the following describes a short position in an option? A position in an option lasting less than one !onth A position in an option lasting less than three !onths A position in an option lasting less than si* !onths A position where an option has been sold
Answer: D A short position is a position where the option has been sold 7the opposite to a long position8. 2. Which of the following describes a di&erence between a warrant and an e*changetraded stoc" option? A. /n a warrant issue, so!eone has guaranteed the perfor!ance of the option seller in the e$ent that the option is e*ercised B. The nu!ber of warrants is 9*ed whereas the nu!ber of e*change traded options in e*istence depends on trading C. *changetraded stoc" options ha$e a stri"e price D. Warrants cannot be traded after they ha$e been purchased Answer: B A warrant is a 9*ed nu!ber of options issued by a co!pany. They often trade on an e*change after they ha$e been issued. ;. Which of the following describes %A
B. =ptions where the stri"e price changes through ti!e C. *changetraded stoc" options with longer li$es than regular e*changetraded stoc" options D. =ptions on the a$erage stoc" price during a period of ti!e Answer: C %A< are longter! e4uity anticipation securities. They are e*change traded options with relati$ely long !aturities.
6. Which of the following is an e*a!ple of an option class? A. All calls on a certain stoc" B. All calls with a particular stri"e price on a certain stoc" C. All calls with a particular ti!e to !aturity on a certain stoc" D. All calls with a particular ti!e to !aturity and stri"e price on a certain stoc" Answer: A An option class is all calls on a certain stoc" or all puts on a certain stoc". 1(.Which of the following is an e*a!ple of an option series? A. All calls on a certain stoc" B. All calls with a particular stri"e price on a certain stoc" C. All calls with a particular ti!e to !aturity on a certain stoc" D. All calls with a particular ti!e to !aturity and stri"e price on a certain stoc" Answer: D All options on a certain stoc" of a certain type 7calls or put8 with a certain stri"e price and ti!e to !aturity are referred to as an option series. 11.Which of the following !ust post !argin? A. The seller of an option B. The buyer of an option C. The seller and the buyer of an option D. #either the seller nor the buyer of an option Answer: A The seller of the option !ust post !argin as a guarantee that the payo& on the option 7if there is one8 will be !ade. The buyer of the option usually pays for the option upfront and so no !argin is re4uired.
1.Which of the following describes a long position in an option? A. A position where there is !ore than one year to !aturity B. A position where there is !ore than 9$e years to !aturity C. A position where an option has been purchased D. A position that has been held for a long ti!e Answer: C A long position is a position where an option has been purchased. /t can be contrasted with a short position which is a position where an option has been sold.
1+.Which of the following is #=T traded by the CB=? A. Wee"lys B. >onthlys C. Binary options D. D==> options Answer: B >onthlys are not a CB= product. The others are.
10.When a si*!onth option is purchased A. The price !ust be paid in full B. p to ) of the option price can be borrowed using a !argin account C. p to )( of the option price can be borrowed using a !argin account D. p to 2) of the option price can be borrowed using a !argin account Answer: A =nly options lasting !ore than 6 !onths can be bought on !argin. 1).Which of the following are true for CB= stoc" options? A. There are no !argin re4uire!ents B. The initial !argin and !aintenance !argin are deter!ined by for!ulas and are e4ual C. The initial !argin and !aintenance !argin are deter!ined by for!ulas and are di&erent D. The !aintenance !argin is usually about 2) of the initial !argin Answer: B >argin accounts for options !ust be brought up to the initial5!aintenance !argin le$el e$ery day.
13.The price of a stoc" is -32. A trader sells ) put option contracts on the stoc" with a stri"e price of -2( when the option price is -0. The options are e*ercised when the stoc" price is -36. What is the trader@s net pro9t or loss? A. %oss of -1,)(( B. %oss of -)(( C. ain of -1,)(( D. %oss of -1,((( Answer: C The option payo& is 2(36 -1. The a!ount recei$ed for the option is -0. The gain is -+ per option. /n total )1(( )(( options are sold. The total gain is therefore -+ )(( -1,)((.
12.A trader buys a call and sells a put with the sa!e stri"e price and !aturity date. What is the position e4ui$alent to? A. A long forward B. A short forward C. Buying the asset D. #one of the abo$e Answer: A 'ro! adding up the two payo&s we see that A is true: !a*7< TE,(8!a*7E< T,(8 < TE
1;.The price of a stoc" is -30. A trader buys 1 put option contract on the stoc" with a stri"e price of -3( when the option price is -1(. When does the trader !a"e a pro9t? A. When the stoc" price is below -3( B. When the stoc" price is below -30 C. When the stoc" price is below -)0 D. When the stoc" price is below -)( Answer: D The payo& !ust be !ore than the -1( paid for the option. The stoc" price !ust therefore be below -)(.
16.Consider a put option and a call option with the sa!e stri"e price and ti!e to !aturity. Which of the following is true?
A. B. C. D.
/t is possible for both options to be in the !oney /t is possible for both options to be out of the !oney =ne of the options !ust be in the !oney =ne of the options !ust be either in the !oney or at the !oney
Answer: D /f the stoc" price is greater than the stri"e price the call is in the !oney and the put is out of the !oney. /f the stoc" price is less than the stri"e price the call is out of the !oney and the put is in the !oney. /f the stoc" price is e4ual to the stri"e price both options are at the !oney.
(./n which of the following cases is an asset #=T considered constructi$ely sold? A. The owner shorts the asset B. The owner buys an inthe!oney put option on the asset C. The owner shorts a forward contract on the asset D. The owner shorts a futures contract on the stoc" Answer: B ro9ts on the asset ha$e to be recogniFed in A, C, and D. The holder of the asset cannot defer recognition of pro9ts with the trades indicated. /n the case of B the asset is not considered constructi$ely sold. Buying a deepin the!oney put option is a way of al!ost certainly loc"ing in a pro9t on an asset without triggering an i!!ediate ta* liability.
