Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 17: Options on Stock Indices and Currencies Multiple Choice est !ank: "uestions 1. Which of the following following describes describes what a company should should do to create create a range range forward contract in order to hedge foreign currency that will be received? A. Buy a put and sell sell a call on the the currency currency with the strike strike price price of the put higher than that of the call B. Buy a put and sell sell a call on the the currency currency with the strike strike price price of the put lower than that of the call C. Buy a call and sell a put on the the currency currency with the strike strike price price of the put higher than that of the call D. Buy a call and sell a put on the the currency currency with the strike strike price price of the put lower than that of the call . Which of the following following describes describes what a company should should do to create create a range range forward contract in order to hedge foreign currency that will be paid? A. Buy a put and sell sell a call on the the currency currency with the strike strike price price of the put higher than that of the call B. Buy a put and sell sell a call on the the currency currency with the strike strike price price of the put lower than that of the call C. Buy a call and sell a put on the the currency currency with the strike strike price price of the put higher than that of the call D. Buy a call and sell a put on the the currency currency with the strike strike price price of the put lower than that of the call !. What should should the continuous continuous dividend dividend yield yield be replaced replaced by when options options on an e"change rate are valued using the formula for an option on a stock paying a continuous dividend yield? A. #he domestic domestic risk$f risk$free ree rate rate B. #he foreign foreign risk$fr risk$free ee rate C. #he foreign foreign risk$free risk$free rate minus the the domestic risk$free risk$free rate D. %one of the the above above &. 'uppose that that the domestic domestic risk free rate rate is r and dividend dividend yield on on an inde" inde" is (. )ow should the put$call parity formula for options on a non$dividend$paying stock be changed to provide a put$call parity formula for options on a stock inde"? Assume the options last # years. A. #he stock price price is replaced by the value value of the inde" inde" multiplied multiplied by e"p*(#+ B. #he stock price price is replaced by the value value of the inde" inde" multiplied multiplied by e"p*r#+ C. #he stock price price is replaced by the value value of the inde" inde" multiplied multiplied by e"p*$(#+ D. #he stock price price is replaced by the value value of the inde" inde" multiplied multiplied by e"p*r#+
,. A portfolio manager in charge of a portfolio worth -1 million is concerned that stock prices might decline rapidly during the ne"t si" months and would like to use put options on an inde" to provide protection against the portfolio falling below -/., million. #he inde" is currently standing at , and each contract is on 1 times the inde". What position is re(uired if the portfolio has a beta of 1? A. 'hort contracts B. 0ong contracts C. 'hort 1 contracts D. 0ong 1 contracts . A portfolio manager in charge of a portfolio worth -1 million is concerned that the market might decline rapidly during the ne"t si" months and would like to use put options on an inde" to provide protection against the portfolio falling below -/., million. #he inde" is currently standing at , and each contract is on 1 times the inde". What should the strike price of options on the inde" be the portfolio has a beta of 1? A. &, B. &, C. &2, D. , 2. A portfolio manager in charge of a portfolio worth -1 million is concerned that the market might decline rapidly during the ne"t si" months and would like to use put options on an inde" to provide protection against the portfolio falling below -/., million. #he inde" is currently standing at , and each contract is on 1 times the inde". What position is re(uired if the portfolio has a beta of .,? A. 'hort contracts B. 0ong contracts C. 'hort 1 contracts D. 0ong 1 contracts 3. A portfolio manager in charge of a portfolio worth -1 million is concerned that the market might decline rapidly during the ne"t si" months and would like to use put options on an inde" to provide protection against the portfolio falling below -/., million. #he inde" is currently standing at , and each contract is on 1 times the inde". What should the strike price of options on the inde" be if the portfolio has a beta of .,? Assume that the risk$free rate is 14 per annum and there are no dividends. A. & B. &1 C. & D. &, /. 5or a 6uropean put option on an inde"7 the inde" level is 177 the strike price is 1,7 the time to maturity is si" months7 the risk$free rate is &4 per annum7 and the dividend yield on the inde" is 4 per annum. )ow low can the
option price be without there being an arbitrage opportunity? A. -,. B. -&!.11 C. -/.1 D. -!/.1 1.5or a 6uropean call option on a currency7 the e"change rate is 1.7 the strike price is ./17 the time to maturity is one year7 the domestic risk$free rate is ,4 per annum7 and the foreign risk$free rate is !4 per annum. )ow low can the option price be without there being an arbitrage opportunity? A. .1&3 B. ./ C. .1!&& D. .111 11.8nde" put options are used to provide protection against the value of the portfolio falling below a certain level. Which of the following is true as the beta of the portfolio increases? A. #he cost of hedging increases B. #he re(uired options have a higher strike price C. #he number of options re(uired increases D. All of the above 1.Which of the following is %9# true about a range forward contract? A. 8t ensures that the e"change rate for a future transaction will lie between two values B. 8t can be structured so that it costs nothing to set up C. 8t re(uires a forward contract as well as two options D. 8t can be used to hedge either a future in:ow or a future out:ow of a foreign currency 1!.A binomial tree with three$month time steps is used to value a currency option. #he domestic and foreign risk$free rates are &4 and 4 respectively. #he volatility of the e"change rate is 14. What is the probability of an up movement? A. .&&!, B. .,2 C. .,,, D. .,221 1&.A binomial tree with one$month time steps is used to value an inde" option. #he interest rate is !4 per annum and the dividend yield is 14 per annum. #he volatility of the inde" is 14. What is the probability of an up movement? A. .&2& B. .,, C. .,,/ D. .,3!! 1,.A 6uropean at$the$money call option on a currency has four years until maturity. #he e"change rate volatility is 147 the domestic risk$free rate is 4
and the foreign risk$free rate is ,4. #he current e"change rate is 1.. What is the value of the option? A. ./3%*.,+$1.11*.,+ B. ./3%*$.!+$1.11%*$.,+ C. ./3%*$.,+$1.11%*$.2+ D. ./3%*.1+$1.11%*.+
1.A 6uropean at$the$money put option on a currency has four years until maturity. #he e"change rate volatility is 147 the domestic risk$free rate is 4 and the foreign risk$free rate is ,4. #he current e"change rate is 1.. What is the value of the option? A. 1.11%*.2+$./3%*.,+ B. 1.11%*$.2+$./3%*$.,+ C. 1.11%*.2+$./3%*.&+ D. 1.11%*$.+$./3%*$.1+ 12.Which of the following is true when a 6uropean currency option is valued using forward e"change rates? A. 8t is not necessary to know the domestic interest rate or the spot e"change rate B. 8t is not necessary to know either the foreign or domestic interest rate C. 8t is necessary to know the di;erence between the foreign and domestic interest rates but not the rates themselves D. 8t is not necessary to know the foreign interest rate or the spot e"change rate 13.What is the si ,? A. , times the inde" B. 1 times the inde" C. , times the inde" D. , times the inde" 1/.#he domestic risk$free rate is !4. #he foreign risk$free rate is ,4. What is the risk$neutral growth rate of the e"change rate? A. 4 B. $4 C. ,4 D. !4 .What is the same as 1 call options to buy one unit of currency A with currency B at a strike price of 1.,? A. 1 call options to buy one unit of currency B with currency A at a strike price of .3 B. 1, call options to buy one unit of currency B with currency A at a strike price of .3 C. 1 put options to sell one unit of currency B for currency A at a strike price of .3 D. 1, put options to sell one unit of currency B for currency A at a strike price of .3
