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Options Futures and Other Derivatives 10th Edition By JohnC. - Test Bank
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, Hull: Options, Futures, and Other Derivatives, Tenth EditionChapter 1: Introduction
Multiple Choice Test Bank: Questions with Answers
1. A one-year forward contract is an agreement where
A. One side has the right to buy an asset for a certain price in one year’s time.
B. One side has the obligation to buy an asset for a certain price in one year’s time.
C. One side has the obligation to buy an asset for a certain price at some time during the
next year.
D. One side has the obligation to buy an asset for the market price in one year’s time.
Answer: B
A one-year forward contract is an obligation to buy or sell in one year’s time for a
predetermined price. By contrast, an option is the right to buy or sell.
2. Which of the following is NOT true
A. When a CBOE call option on IBM is exercised, IBM issues more stock
B. An American option can be exercised at any time during its life
C. An call option will always be exercised at maturity if the underlying asset price is greater
than the strike price
D. A put option will always be exercised at maturity if the strike price is greater than the
underlying asset price.
Answer: A
When an IBM call option is exercised the option seller must buy shares in the market to sell to
the option buyer. IBM is not involved in any way. Answers B, C, and D are true.
3. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the
stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put
option. The breakeven stock price above which the trader makes a profit is
A. $35
B. $40
C. $30
D. $36
Answer: A
When the stock price is $35, the two call options provide a payoff of 2×(35−30) or $10. The put
option provides no payoff. The total cost of the options is 2×3+ 4 or $10. The stock price in A,
$35, is therefore the breakeven stock price above which the position is profitable because it is
the price for which the cost of the options equals the payoff.
4. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the
stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put
, option. The breakeven stock price below which the trader makes a profit is
A. $25
B. $28
C. $26
D. $20
Answer: D
When the stock price is $20 the two call options provide no payoff. The put option provides a
payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or $10. The stock price in D, $20,
is therefore the breakeven stock price below which the position is profitable because it is the
price for which the cost of the options equals the payoff.
5. Which of the following is approximately true when size is measured in terms of the underlying
principal amounts or value of the underlying assets
A. The exchange-traded market is twice as big as the over-the-counter market.
B. The over-the-counter market is twice as big as the exchange-traded market.
C. The exchange-traded market is ten times as big as the over-the-counter market.
D. The over-the-counter market is ten times as big as the exchange-traded market.
Answer: D
The OTC market is about $500 trillion whereas the exchange-traded market is about $60 trillion.
6. Which of the following best describes the term “spot price”
A. The price for immediate delivery
B. The price for delivery at a future time
C. The price of an asset that has been damaged
D. The price of renting an asset
Answer: A
The spot price is the price for immediate delivery. The futures or forward price is the price for
delivery in the future
7. Which of the following is true about a long forward contract
A. The contract becomes more valuable as the price of the asset declines
B. The contract becomes more valuable as the price of the asset rises
C. The contract is worth zero if the price of the asset declines after the contract has been
entered into
D. The contract is worth zero if the price of the asset rises after the contract has been
entered into
Answer: B
, A long forward contract is an agreement to buy the asset at a predetermined price. The contract
becomes more attractive as the market price of the asset rises. The contract is only worth zero
when the predetermined price in the forward contract equals the current forward price (as it
usually does at the beginning of the contract).
8. An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on
100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the
following is true
A. The investor has made a gain of $4,000
B. The investor has made a loss of $4,000
C. The investor has made a gain of $2,000
D. The investor has made a loss of $2,000
Answer: B
An investor who buys (has a long position) has a gain when a futures price increases. An investor
who sells (has a short position) has a loss when a futures price increases.
9. Which of the following describes European options?
A. Sold in Europe
B. Priced in Euros
C. Exercisable only at maturity
D. Calls (there are no European puts)
Answer: C
European options can be exercised only at maturity. This is in contrast to American options
which can be exercised at any time. The term “European” has nothing to do with geographical
location, currencies, or whether the option is a call or a put.
10. Which of the following is NOT true
A. A call option gives the holder the right to buy an asset by a certain date for a certain
price
B. A put option gives the holder the right to sell an asset by a certain date for a certain
price
C. The holder of a call or put option must exercise the right to sell or buy an asset
D. The holder of a forward contract is obligated to buy or sell an asset
Answer: C
The holder of a call or put option has the right to exercise the option but is not required to do
so. A, B, and C are correct
11. Which of the following is NOT true about call and put options:
A. An American option can be exercised at any time during its life
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