Hull: Options, Futures, and Other Derivatives, Ninth Edition,
Global Edition
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 $600 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
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
Answer: D
A call option is the option to buy for the strike price. As the strike price increases this
option becomes less attractive and is therefore less valuable. A, B, and C are true.
12. The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a
strike price of $60 when the option price is $2. The options are exercised when the stock
price is $65. The trader’s net profit is
A. $700
B. $500
C. $300
D. $600
Answer: C
The payoff from the options is 100×(65-60) or $500. The cost of the options is 2×100 or
$200. The net profit is therefore 500−200 or $300.
13. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with
a strike price of $120 when the option price is $5. The options are exercised when the
stock price is $110. The trader’s net profit or loss is
A. Gain of $1,000
B. Loss of $2,000
C. Loss of $2,800
D. Loss of $1,000
Answer: D
Global Edition
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 $600 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
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
Answer: D
A call option is the option to buy for the strike price. As the strike price increases this
option becomes less attractive and is therefore less valuable. A, B, and C are true.
12. The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a
strike price of $60 when the option price is $2. The options are exercised when the stock
price is $65. The trader’s net profit is
A. $700
B. $500
C. $300
D. $600
Answer: C
The payoff from the options is 100×(65-60) or $500. The cost of the options is 2×100 or
$200. The net profit is therefore 500−200 or $300.
13. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with
a strike price of $120 when the option price is $5. The options are exercised when the
stock price is $110. The trader’s net profit or loss is
A. Gain of $1,000
B. Loss of $2,000
C. Loss of $2,800
D. Loss of $1,000
Answer: D
