Hull:jOptions,jFutures,jandjOtherjDerivatives,jNinthjEdition,jG
lobaljEdition
MultiplejChoicejTestjBank:jQuestionsjwithjAnswers
1. Ajone-yearjforwardjcontractjisjanjagreementjwhere
A. Onejsidejhasjthejrightjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
B. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
C. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejatjsomejtimejdu
ringjthejnextjyear.
D. Onejsidejhasjthejobligationjtojbuyjanjassetjforjthejmarketjpricejinjonejyear’sjtim
e.
Answer:jB
Ajone-
yearjforwardjcontractjisjanjobligationjtojbuyjorjselljinjonejyear’sjtimejforjajpredeterminedjprice.
jByjcontrast,janjoptionjisjthejrightjtojbuyjorjsell.
2. WhichjofjthejfollowingjisjNOTjtrue
A. WhenjajCBOEjcalljoptionjonjIBMjisjexercised,jIBMjissuesjmorejstock
B. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
C. Anjcalljoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejunderlyingjassetjpricejisjgre
aterjthanjthejstrikejprice
D. Ajputjoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejstrikejpricejisjgreaterjthanjth
ejunderlyingjassetjprice.
Answer:jA
WhenjanjIBMjcalljoptionjisjexercisedjthejoptionjsellerjmustjbuyjsharesjinjthejmarketjtojselljt
ojthejoptionjbuyer.jIBMjisjnotjinvolvedjinjanyjway.jAnswersjB,jC,jandjDjarejtrue.
3. Ajone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthejstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysjtwoj
calljoptionsjandjonejputjoption.jThejbreakevenjstockjpricejabovejwhichjthejtraderjmakesjaj
profitjis
A. $35
B. $40
C. $30
D. $36
Answer:jA
Whenjthejstockjpricejisj$35,jthejtwojcalljoptionsjprovidejajpayoffjofj2×(35−30)jorj$10.jThejp
utjoptionjprovidesjnojpayoff.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j The
, stockjpricejinjA,j$35,jisjthereforejthejbreakevenjstockjpricejabovejwhichjthejpositionjisjprofitabl
ejbecausejitjisjthejpricejforjwhichjthejcostjofjthejoptionsjequalsjthejpayoff.
4. Ajone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthejstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysjtwoj
calljoptionsjandjonejputjoption.jThejbreakevenjstockjpricejbelowjwhichjthejtraderjmakesjaj
profitjis
A. $25
B. $28
C. $26
D. $20
Answer:jD
Whenjthejstockjpricejisj$20jthejtwojcalljoptionsjprovidejnojpayoff.jThejputjoptionjprovidesj
ajpayoffjofj30−20jorj$10.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j ThejstockjpricejinjD,j
$20,jisjthereforejthejbreakevenjstockjpricejbelowjwhichjthejpositionjisjprofitablejbecausejitj
isjthejpricejforjwhichjthejcostjofjthejoptionsjequalsjthejpayoff.
5. Whichj ofj thej followingj isj approximatelyj truej whenj sizej isj measuredj inj termsj ofj thejun
derlyingjprincipaljamountsjorjvaluejofjthejunderlyingjassets
A. Thejexchange-tradedjmarketjisjtwicejasjbigjasjthejover-the-counterjmarket.
B. Thejover-the-counterjmarketjisjtwicejasjbigjasjthejexchange-tradedjmarket.
C. Thejexchange-tradedjmarketjisjtenjtimesjasjbigjasjthejover-the-counterjmarket.
D. Thejover-the-counterjmarketjisjtenjtimesjasjbigjasjthejexchange-tradedjmarket.
Answer:jD
ThejOTCjmarketjisjaboutj$600jtrillionjwhereasjthejexchange-tradedjmarketjisjaboutj$60jtrillion.
6. Whichjofjthejfollowingjbestjdescribesjthejtermj“spotjprice”
A. Thejpricejforjimmediatejdelivery
B. Thejpricejforjdeliveryjatjajfuturejtime
C. Thejpricejofjanjassetjthatjhasjbeenjdamaged
D. Thejpricejofjrentingjanjasset
Answer:jA
Thejspotjpricejisjthejpricejforjimmediatejdelivery.jThejfuturesjorjforwardjpricejisjthejpricejforj
deliveryjinjthejfuture
,7. Whichjofjthejfollowingjisjtruejaboutjajlongjforwardjcontract
A. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjdeclines
B. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjrises
C. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjdeclinesjafterjthejcontractjhasjbe
enjenteredjinto
D. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjrisesjafterjthejcontractjhasjbeenjent
eredjinto
Answer:j B
Ajlongjforwardjcontractjisjanjagreementjtojbuyjthejassetjatjajpredeterminedjprice.jThejco
ntractjbecomesjmorejattractivejasjthejmarketjpricejofjthejassetjrises.jThejcontractjisjonlyj
worthjzerojwhenjthejpredeterminedjpricejinjthejforwardjcontractjequalsjthe
currentjforwardjpricej(asjitjusuallyjdoesjatjthejbeginningjofjthejcontract).
8. Anjinvestorjsellsjajfuturesjcontractjanjassetjwhenjthejfuturesjpricejisj$1,500.jEachjcontractjisjo
nj100junitsjofjthejasset.jThejcontractjisjclosedjoutjwhenjthejfuturesjpricejisj$1,540.jWhichjo
fjthejfollowingjisjtrue
A. Thejinvestorjhasjmadejajgainjofj$4,000
B. Thejinvestorjhasjmadejajlossjofj$4,000
C. Thejinvestorjhasjmadejajgainjofj$2,000
D. Thejinvestorjhasjmadejajlossjofj$2,000
Answer:jB
Anjinvestorjwhojbuysj(hasjajlongjposition)jhasjajgainjwhenjajfuturesjpricejincreases.jAnjinvesto
rjwhojsellsj(hasjajshortjposition)jhasjajlossjwhenjajfuturesjpricejincreases.
9. WhichjofjthejfollowingjdescribesjEuropeanjoptions?
A. SoldjinjEurope
B. PricedjinjEuros
C. Exercisablejonlyjatjmaturity
D. Callsj(therejarejnojEuropeanjputs)
Answer:jC
Europeanjoptionsjcanjbejexercisedjonlyjatjmaturity.jThisjisjinjcontrastjtojAmericanjoptionsj
whichjcanjbejexercisedjatjanyjtime.jThejtermj“European”jhasjnothingjtojdojwithjgeographic
aljlocation,jcurrencies,jorjwhetherjthejoptionjisjajcalljorjajput.
10. WhichjofjthejfollowingjisjNOTjtrue
A. Ajcalljoptionjgivesjthejholderjthejrightjtojbuyjanjassetjbyjajcertainjdatejforjajcertain
, price
B. Ajputjoptionjgivesjthejholderjthejrightjtojselljanjassetjbyjajcertainjdatejforjajcertainjpri
ce
C. Thejholderjofjajcalljorjputjoptionjmustjexercisejthejrightjtojselljorjbuyjanjasset
D. Thejholderjofjajforwardjcontractjisjobligatedjtojbuyjorjselljanjasset
Answer:jC
Thejholderjofjajcalljorjputjoptionjhasjthejrightjtojexercisejthejoptionjbutjisjnotjrequiredjtojd
ojso.jA,jB,jandjCjarejcorrect
11. WhichjofjthejfollowingjisjNOTjtruejaboutjcalljandjputjoptions:
A. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
B. AjEuropeanjoptionjcanjonlyjbejexercisedjonlyjonjthejmaturityjdate
C. Investorsjmustjpayjanjupfrontjpricej(thejoptionjpremium)jforjanjoptionjcontract
D. Thejpricejofjajcalljoptionjincreasesjasjthejstrikejpricejincreases
Answer:jD
Aj callj optionj isj thejoptionj toj buyj forj thej strikej price.j Asj thej strikej pricejincreasesj thisjoptionj
becomesjlessjattractivejandjisjthereforejlessjvaluable.jA,jB,jandjCjarejtrue.
12. ThejpricejofjajstockjonjJulyj1jisj$57.jAjtraderjbuysj100jcalljoptionsjonjthejstockjwithjajstrikej
pricejofj$60jwhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$
65.jThejtrader’sjnetjprofitjis
A. $700
B. $500
C. $300
D. $600
Answer:jC
Thejpayoffjfromjthejoptionsjisj100×(65-60)jorj$500.jThejcostjofjthejoptionsjisj2×100jor
$200.jThejnetjprofitjisjthereforej500−200jorj$300.
13. ThejpricejofjajstockjonjFebruaryj1jisj$124.jAjtraderjsellsj200jputjoptionsjonjthejstockjwithjajstr
ikejpricejofj$120jwhenjthejoptionjpricejisj$5.jThejoptionsjarejexercisedjwhenjthejstockjpric
ejisj$110.jThejtrader’sjnetjprofitjorjlossjis
A. Gainjofj$1,000
B. Lossjofj$2,000
C. Lossjofj$2,800
D. Lossjofj$1,000j
Answer:jD
lobaljEdition
MultiplejChoicejTestjBank:jQuestionsjwithjAnswers
1. Ajone-yearjforwardjcontractjisjanjagreementjwhere
A. Onejsidejhasjthejrightjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
B. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
C. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejatjsomejtimejdu
ringjthejnextjyear.
D. Onejsidejhasjthejobligationjtojbuyjanjassetjforjthejmarketjpricejinjonejyear’sjtim
e.
Answer:jB
Ajone-
yearjforwardjcontractjisjanjobligationjtojbuyjorjselljinjonejyear’sjtimejforjajpredeterminedjprice.
jByjcontrast,janjoptionjisjthejrightjtojbuyjorjsell.
2. WhichjofjthejfollowingjisjNOTjtrue
A. WhenjajCBOEjcalljoptionjonjIBMjisjexercised,jIBMjissuesjmorejstock
B. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
C. Anjcalljoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejunderlyingjassetjpricejisjgre
aterjthanjthejstrikejprice
D. Ajputjoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejstrikejpricejisjgreaterjthanjth
ejunderlyingjassetjprice.
Answer:jA
WhenjanjIBMjcalljoptionjisjexercisedjthejoptionjsellerjmustjbuyjsharesjinjthejmarketjtojselljt
ojthejoptionjbuyer.jIBMjisjnotjinvolvedjinjanyjway.jAnswersjB,jC,jandjDjarejtrue.
3. Ajone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthejstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysjtwoj
calljoptionsjandjonejputjoption.jThejbreakevenjstockjpricejabovejwhichjthejtraderjmakesjaj
profitjis
A. $35
B. $40
C. $30
D. $36
Answer:jA
Whenjthejstockjpricejisj$35,jthejtwojcalljoptionsjprovidejajpayoffjofj2×(35−30)jorj$10.jThejp
utjoptionjprovidesjnojpayoff.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j The
, stockjpricejinjA,j$35,jisjthereforejthejbreakevenjstockjpricejabovejwhichjthejpositionjisjprofitabl
ejbecausejitjisjthejpricejforjwhichjthejcostjofjthejoptionsjequalsjthejpayoff.
4. Ajone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthejstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysjtwoj
calljoptionsjandjonejputjoption.jThejbreakevenjstockjpricejbelowjwhichjthejtraderjmakesjaj
profitjis
A. $25
B. $28
C. $26
D. $20
Answer:jD
Whenjthejstockjpricejisj$20jthejtwojcalljoptionsjprovidejnojpayoff.jThejputjoptionjprovidesj
ajpayoffjofj30−20jorj$10.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j ThejstockjpricejinjD,j
$20,jisjthereforejthejbreakevenjstockjpricejbelowjwhichjthejpositionjisjprofitablejbecausejitj
isjthejpricejforjwhichjthejcostjofjthejoptionsjequalsjthejpayoff.
5. Whichj ofj thej followingj isj approximatelyj truej whenj sizej isj measuredj inj termsj ofj thejun
derlyingjprincipaljamountsjorjvaluejofjthejunderlyingjassets
A. Thejexchange-tradedjmarketjisjtwicejasjbigjasjthejover-the-counterjmarket.
B. Thejover-the-counterjmarketjisjtwicejasjbigjasjthejexchange-tradedjmarket.
C. Thejexchange-tradedjmarketjisjtenjtimesjasjbigjasjthejover-the-counterjmarket.
D. Thejover-the-counterjmarketjisjtenjtimesjasjbigjasjthejexchange-tradedjmarket.
Answer:jD
ThejOTCjmarketjisjaboutj$600jtrillionjwhereasjthejexchange-tradedjmarketjisjaboutj$60jtrillion.
6. Whichjofjthejfollowingjbestjdescribesjthejtermj“spotjprice”
A. Thejpricejforjimmediatejdelivery
B. Thejpricejforjdeliveryjatjajfuturejtime
C. Thejpricejofjanjassetjthatjhasjbeenjdamaged
D. Thejpricejofjrentingjanjasset
Answer:jA
Thejspotjpricejisjthejpricejforjimmediatejdelivery.jThejfuturesjorjforwardjpricejisjthejpricejforj
deliveryjinjthejfuture
,7. Whichjofjthejfollowingjisjtruejaboutjajlongjforwardjcontract
A. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjdeclines
B. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjrises
C. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjdeclinesjafterjthejcontractjhasjbe
enjenteredjinto
D. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjrisesjafterjthejcontractjhasjbeenjent
eredjinto
Answer:j B
Ajlongjforwardjcontractjisjanjagreementjtojbuyjthejassetjatjajpredeterminedjprice.jThejco
ntractjbecomesjmorejattractivejasjthejmarketjpricejofjthejassetjrises.jThejcontractjisjonlyj
worthjzerojwhenjthejpredeterminedjpricejinjthejforwardjcontractjequalsjthe
currentjforwardjpricej(asjitjusuallyjdoesjatjthejbeginningjofjthejcontract).
8. Anjinvestorjsellsjajfuturesjcontractjanjassetjwhenjthejfuturesjpricejisj$1,500.jEachjcontractjisjo
nj100junitsjofjthejasset.jThejcontractjisjclosedjoutjwhenjthejfuturesjpricejisj$1,540.jWhichjo
fjthejfollowingjisjtrue
A. Thejinvestorjhasjmadejajgainjofj$4,000
B. Thejinvestorjhasjmadejajlossjofj$4,000
C. Thejinvestorjhasjmadejajgainjofj$2,000
D. Thejinvestorjhasjmadejajlossjofj$2,000
Answer:jB
Anjinvestorjwhojbuysj(hasjajlongjposition)jhasjajgainjwhenjajfuturesjpricejincreases.jAnjinvesto
rjwhojsellsj(hasjajshortjposition)jhasjajlossjwhenjajfuturesjpricejincreases.
9. WhichjofjthejfollowingjdescribesjEuropeanjoptions?
A. SoldjinjEurope
B. PricedjinjEuros
C. Exercisablejonlyjatjmaturity
D. Callsj(therejarejnojEuropeanjputs)
Answer:jC
Europeanjoptionsjcanjbejexercisedjonlyjatjmaturity.jThisjisjinjcontrastjtojAmericanjoptionsj
whichjcanjbejexercisedjatjanyjtime.jThejtermj“European”jhasjnothingjtojdojwithjgeographic
aljlocation,jcurrencies,jorjwhetherjthejoptionjisjajcalljorjajput.
10. WhichjofjthejfollowingjisjNOTjtrue
A. Ajcalljoptionjgivesjthejholderjthejrightjtojbuyjanjassetjbyjajcertainjdatejforjajcertain
, price
B. Ajputjoptionjgivesjthejholderjthejrightjtojselljanjassetjbyjajcertainjdatejforjajcertainjpri
ce
C. Thejholderjofjajcalljorjputjoptionjmustjexercisejthejrightjtojselljorjbuyjanjasset
D. Thejholderjofjajforwardjcontractjisjobligatedjtojbuyjorjselljanjasset
Answer:jC
Thejholderjofjajcalljorjputjoptionjhasjthejrightjtojexercisejthejoptionjbutjisjnotjrequiredjtojd
ojso.jA,jB,jandjCjarejcorrect
11. WhichjofjthejfollowingjisjNOTjtruejaboutjcalljandjputjoptions:
A. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
B. AjEuropeanjoptionjcanjonlyjbejexercisedjonlyjonjthejmaturityjdate
C. Investorsjmustjpayjanjupfrontjpricej(thejoptionjpremium)jforjanjoptionjcontract
D. Thejpricejofjajcalljoptionjincreasesjasjthejstrikejpricejincreases
Answer:jD
Aj callj optionj isj thejoptionj toj buyj forj thej strikej price.j Asj thej strikej pricejincreasesj thisjoptionj
becomesjlessjattractivejandjisjthereforejlessjvaluable.jA,jB,jandjCjarejtrue.
12. ThejpricejofjajstockjonjJulyj1jisj$57.jAjtraderjbuysj100jcalljoptionsjonjthejstockjwithjajstrikej
pricejofj$60jwhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$
65.jThejtrader’sjnetjprofitjis
A. $700
B. $500
C. $300
D. $600
Answer:jC
Thejpayoffjfromjthejoptionsjisj100×(65-60)jorj$500.jThejcostjofjthejoptionsjisj2×100jor
$200.jThejnetjprofitjisjthereforej500−200jorj$300.
13. ThejpricejofjajstockjonjFebruaryj1jisj$124.jAjtraderjsellsj200jputjoptionsjonjthejstockjwithjajstr
ikejpricejofj$120jwhenjthejoptionjpricejisj$5.jThejoptionsjarejexercisedjwhenjthejstockjpric
ejisj$110.jThejtrader’sjnetjprofitjorjlossjis
A. Gainjofj$1,000
B. Lossjofj$2,000
C. Lossjofj$2,800
D. Lossjofj$1,000j
Answer:jD
