Optons Fuures and Oher Derivatves 10h Editon Tes Bank IF You Want to Purchase This And Any Other Then:Contact us At: JOHNMATE11!"#ai$%co# Hull: Optons, Fuures, and Oher Derivatves, Tenh Editon Chaper 1: Inroducton Inroducton ultple Choice Tes Bank: !uestons "ih #ns"ers
1. A one-yea one-yearr forwa forward rd contr contract act is an agreeme agreement nt where where A. One side has has the right right to buy an asset asset for a certain certain price price in one year’s year’s me. B. One side has has the obliga obligaon on to buy an asset asset for a certain certain price price in one year’s year’s me. C. One side has has the obliga obligaon on to buy an asset asset for a certain certain price price at some me during during the next year. . One side has the obligaon obligaon to buy buy an asset asset for the mar!et mar!et price in one one year’s me. Answer" B A one-year forward contract is an obligaon to buy or sell in one year’s me for a predetermined price. By contrast# an opon is the right to buy or sell.
$. %hich %hich o off the the foll followi owing ng is is &O' &O' true true A. %hen a CBO( call opon on )B* is exercised# )B* issues more stoc! stoc! B. An American opon opon can be be exercised exercised at any any me during its life C. An call opon will always be be exercised at at maturity if the underlying underlying asset price is greater greater than the stri!e price . A put opon will always always be exercised exercised at maturity if the stri!e stri!e price is greater than the underlying asset price. Answer" A %hen an )B* call opon is exercised the opon seller must buy shares in the mar!et to sell to the opon buyer. )B* is not in+ol+ed in any way. Answers B# C# and are true.
,. A one-year one-year call opon opon on a stoc! stoc! with with a stri!e stri!e price price of , costs costs ,/ a one-year one-year put put opon on the the stoc! with a stri!e price of , costs 0. uppose that a trader buys two call opons and one put opon. 'he brea!e+en stoc! price abo+e which the trader ma!es a pro2t is A. ,3 B. 0
C. , . ,4 Answer" A %hen the stoc! price is ,3# the two call opons pro+ide a payo5 of $67,38,9 or 1. 'he put opon pro+ides no payo5 payo5.. 'he total cost of the opons is $6,: 0 or 1. 'he stoc! price in A# ,3# is therefore the brea!e+en stoc! price abo+e which the posion is pro2table because it is the price for which the cost of the opons e;uals the payo5. payo5.
0. A one-year one-year call opon opon on a stoc! stoc! with with a stri!e stri!e price price of , costs costs ,/ a one-year one-year put put opon on the the stoc! with a stri!e price of , costs 0. uppose that a trader buys two call opons and one put opon. 'he brea!e+en stoc! price below which the trader ma!es a pro2t is A. $3 B. $< C. $4 . $ Answer" %hen the stoc! price is $ the two call opons pro+ide no payo5. payo5. 'he put opon pro+ides a payo5 of ,8$ or 1. 'he total total cost of the opons is $6,: $6,: 0 or 1. 'he stoc! price in # $# is therefore the brea!e+en stoc! price below which the posion is pro2table because it is the price for which the cost of the opons e;uals the payo5. payo5.
3. %hich of the the following following is appro approxima ximately tely true when when si=e si=e is measured measured in terms of the underly underlying ing principal amounts or +alue of the underlying assets A. 'he exchangeexchange-trad traded ed mar!et mar!et is twice as big as the o+er-the-c o+er-the-count ounter er mar!et. mar!et. B. 'he o+er-th o+er-the-cou e-counter nter mar!e mar!ett is twice as big as the the exchange-t exchange-trad raded ed mar!et. mar!et. C. 'he exchang exchange-tr e-traded aded mar!et mar!et is ten ten mes as big as the the o+er-the-c o+er-the-count ounter er mar!et. mar!et. . 'he o+er-the-co o+er-the-count unter er mar!et mar!et is ten mes as big as the exchange-tr exchange-traded aded mar!et. mar!et. Answer" 'he O'C mar!et is about 3 trillion whereas the exchange-traded exchange-traded mar!et is about 4 trillion.
4. %hich of the the followi following ng best best describes describes the term term >spot >spot price? A. 'he pric price e fo forr immed immedia iate te deli deli+e +ery ry B. 'he pric price e fo forr deli+ deli+ery ery at at a futur future e me C. 'he pric price e of an asse assett that that has been been d dama amaged ged . 'he price price of of ren renng ng an an asse assett Answer" A 'he spot price is the price for immediate deli+ery. 'he futures or forward price is the price for deli+ery in the future
@. %hich of the follo following wing is true about about a long long forwar forward d contract contract A. 'he contrac contractt becomes becomes more +alua +aluable ble as the the price of the the asset decline decliness B. 'he contr contract act becomes becomes more more +aluab +aluable le as the the price of of the asset asset rises rises C. 'he contrac contractt is worth =ero =ero if the price price of the asset asset declines declines aer aer the contract contract has has been entered into . 'he contr contract act is worth worth =ero =ero if the price price of the asset rises rises aer aer the contract contract has been been entered into Answer" B A long forward contract is an agreement to buy the asset at a predetermined price. 'he contract becomes more arac+e as the mar!et price of the asset rises. 'he contract is only worth =ero when the predetermined price in the forward contract e;uals the current forward price 7as it usually does at the beginning of the contract9.
<. An in+est in+estor or sells a futures futures contract contract an asset when when the futures futures price is 1#3. 1#3. (ach contr contract act is on 1 units of the asset. 'he contract is closed out when the futures price is 1#30. %hich of the following is true A. 'he in+ in+est estor or has made made a gain gain of of 0# 0# B. 'he in+ in+est estor or has has made made a loss loss of of 0# 0# C. 'he in+ in+est estor or has has made made a gain gain of of $# $# . 'he in+ in+est estor or has made made a loss loss of of $# $# Answer" B An in+estor who buys 7has a long posion9 has a gain when a futures price increases. An in+estor who sells 7has a short posion9 has a loss when a futures price increases.
. %hich of the the follo following wing describ describes es (urop (uropean ean opon oponsD sD A. ol old in in (ur (uro ope B. Eric Ericed ed in (ur (uros os C. (xerc (xercisa isable ble only only at at m matu aturit rityy . Calls Calls 7ther 7there e are no no (urope (uropean an puts9 puts9 Answer" C (uropean opons can be exercised only at maturity. maturity. 'his is in contrast to American opons which can be exercised at any me. 'he term >(uropean? has nothing to do with geographical locaon# currencies# or whether the opon is a call or a put.
1. %hich of the the following following is &O' &O' true A. A call opon opon gi+es gi+es the holder holder the right right to buy an asset asset by a certain certain date date for a certain certain price
B. A put opon opon gi+es gi+es the holder holder the right right to sell an asset asset by a certain certain date date for a certain certain price C. 'he holder holder of a call call or put opon opon must must exercise exercise the the right to to sell or buy buy an asset asset . 'he holder holder of a forward forward contrac contractt is obligated obligated to buy buy or sell an asset asset Answer" C 'he holder of a call or put opon has the right to exercise the opon but is not re;uired to do so. A# B# and C are correct 11. %hich of the following following is &O' &O' true about call and put opons" A. An American American opon opon can be be exercised exercised at at any me me during during its life life B. A (uropean (uropean opon opon can can only be be exercised exercised only only on the the maturity maturity date date C. )n+esto )n+estors rs must pay pay an upfront upfront price 7the opon opon premium9 premium9 for for an opon contract contract . 'he price price of a call call opon opon increases increases as the the stri!e stri!e price increas increases es Answer" A call opon is the opon to buy for the stri!e price. As the stri!e price increases this opon becomes less arac+e and is therefore less +aluable. A# B# and C are true. 1$. 'he price of a stoc! on Fuly 1 is 3@. A trader buys 1 call opons opons on the stoc! with a stri!e stri!e price of 4 when the opon price is $. 'he opons are exercised when the stoc! price is 43. 'he trader’s net pro2t is A. @ B. 3 C. , . 4 Answer" C 'he payo5 from the opons is 16743-49 or 3. 'he cost of the opons is $61 or $. 'he net pro2t is therefore 38$ or ,.
1,. 'he price of a stoc! on Gebruary Gebruary 1 is 1$0. A trader sells $ put opons opons on the stoc! with a stri!e price of 1$ when the opon price is 3. 'he opons are exercised when the stoc! price is 11. 'he trader’s net pro2t or loss is A. Hain Hain of 1# 1# B. Ioss Ioss of $# $# C. Ioss Ioss of $# $#< < . Ioss Ioss of 1# 1# Answer" 'he payo5 that must be made on the opons is $671$8119 or $. 'he amount recei+ed for the opons is 36$ or 1. 'he net loss is therefore $81 or 1.
10. 'he price of a stoc! on Gebruary 1 is <0. A trader buys $ put opons on the the stoc! with a stri!e stri!e price of when the opon price is 1. 'he opons are exercised when the stoc! price is <3. 'he trader’s net pro2t or loss is A. Ioss Ioss of 1# 1# B. Ioss Ioss of $# $# C. Hain of $ $ . Hain Hain of 1 1 Answer" A 'he payo5 is 8<3 or 3 per opon. Gor $ opons the payo5 is therefore 36$ or 1. Jowe+er the opons cost 16$ or $. 'here is therefore a net loss of 1. 13. 'he price of a stoc! on Gebruary Gebruary 1 is 0<. A trader sells $ put opons on the stoc! stoc! with a stri!e stri!e price of 0 when the opon price is $. 'he opons are exercised when the stoc! price is ,. 'he trader’s net pro2t or loss is A. Ioss of of < < B. Ioss of $ $ C. Hain of $ $ . Ioss Ioss of Answer" C 'he payo5 is 08, or 1 per opon. Gor $ opons the payo5 is therefore 16$ or $. Jowe+er the premium recei+ed by the trader is $6$ or 0. 'he trader therefore has a net gain of $.
14. A speculator speculator can choose between between buying buying 1 shares shares of a stoc! stoc! for 0 per share share and buying 1 (uropean call opons on the stoc! with a stri!e price of 03 for 0 per opon. Gor second alterna+e to gi+e a beer outcome at the opon maturity# maturity# the stoc! price must be abo+e A. 03 B. 04 C. 33 . 3 Answer" %hen the stoc! price is 3 the 2rst alterna+e leads to a posion in the stoc! worth 163 or 3. 'he second alterna+e leads to a payo5 from the opons of 16738039 or 3. Both alterna+es cost 0. )t follows that the alterna+es are e;ually pro2table when the stoc! price is 3. Gor stoc! prices abo+e 3 the opon alterna+e is more pro2table.
1@. A compan companyy !nows !nows it wil willl ha+e ha+e to pay pay a certain certain amount amount of a forei foreign gn currency currency to one of its suppliers in the future. %hich of the following is true A. A forward forward contract contract can can be used used to loc! loc! in the exchang exchange e rate rate B. A forward forward contract contract will will alway alwayss gi+e a beer beer outcom outcome e than an opon opon C. An opon opon will alwa always ys gi+e gi+e a beer outco outcome me than a forwar forward d contract contract . An opon opon can be used used to loc! loc! in the the exchange exchange rate rate Answer" A
A forward contract contract ensures that the e5ec+e exchange rate rate will e;ual the current forward exchange rate. rate. An opon pro+ides insurance insurance that the exchange rate rate will not be worse than a certain le+el# but re;uires an upfront premium. Opons somemes gi+e a beer outcome and somemes gi+e a worse outcome than forwards. 1<. A short forward forward contract contract on an asset plus plus a long posion posion in a (uropean (uropean call opon opon on the asset with a stri!e price e;ual to the forward price is e;ui+alent to A. A short short posio posion n in a call call opon opon B. A short short posio posion n in in a put opon opon C. A long long pos posi ion on in in a put put opo opon n . &o &one ne of the the abo abo++e Answer" C uppose that ' is the 2nal asset price and K is the stri!e priceLforward price. A short forward contract leads to a payo5 of K8 '. A long posion in a (uropean call opon leads to a payo5 of max7'8K# 9. %hen added together we see that the total posion leads to a payo5 of max7# K8'9# which is the payo5 from a long posion in a put opon. C can also be seen to be true by ploMng the payo5s as a funcon of the 2nal stoc! price. 1. A trader has a porNolio porNolio worth 3 million that mirrors mirrors the performance of a stoc! stoc! index. 'he stoc! stoc! index is currently 1#$3. Gutures contracts trade on the index with one contract being on $3 mes the index. 'o 'o remo+e mar!et ris! from the porNolio the trader should A. Buy Buy 14 14 con contr trac acts ts B. ell ell 14 con contrac tracts ts C. Buy Buy $ con contrac tracts ts . ell ell $ $ con contrac tracts ts Answer" B One futures contract protects a porNolio worth 1$36$3. 'he number of contract re;uired is therefore 3##L71$36$3914. 'o remo+e mar!et ris! we need to gain on the contracts when the mar!et declines. A short futures posion is therefore re;uired.
$. %hich of the the following following best describes describes a central central clearing party party A. )t is a trader trader tha thatt wor!s wor!s for for an exc exchan hange ge B. )t stands stands between between two pares pares in in the o+er o+er-the-c -the-count ounter er mar!et mar!et C. )t is a trader trader that that wor!s wor!s for for a ban! ban! . )t helps helps facil facilit itat ate e futures futures trade tradess Answer" B A central clearing party 7CCE9 is a clearing house that stands between two pares in the o+erthe-counter mar!et. )t ser+es the same purpose as an exchange clearing house.
