Hull:jOptions,jFutures,jandjOtherjDerivatives,jNinthjEdition,jGlobaljEditionjCh
apterj1:jIntroduction
MultipletChoicejTestjBank:jQuestionsjwithjAnswers
1. Ajone-yearjforwardjcontractjisjanjagreementjwhere
A. Onejsidejhasjthejrightttojbuyjanjassettforjajcertainjpricejinjonejyear’sjtime.
B. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
C. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejatjsomejtimejduringjthejnextjyear.
D. Onejsidejhasjthejobligationjtojbuyjanjassetjforjthetmarketjpricejinjonejyear’sjtime.
Answer:jB
Atone-
yearjforwardjcontractjisjanjobligationjtojbuyjorjselljinjonejyear’sjtimejforjajpredeterminedjprice.jByjcont
rast,janjoptionjisjthejrightjtojbuyjorjsell.
2. WhichjofjthejfollowingjisjNOTjtrue
A. WhenjajCBOEjcalljoptionjonjIBMjisjexercised,jIBMjissuesjmorejstock
B. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlifet
C. Anjcalljoptionjwilljalwaysjbejexercisedjattmaturityjifjthejunderlyingjassetjpricejisjgreaterjthjanjt
hejstrikejprice
D. Ajputjoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejstrikejpricejisjgreaterjthanjthejunderjlying
jassetjprice.
Answer:jA
WhenjanjIBMjcalljoptionjisjexercisedjthejoptionjsellerjmustjbuyjsharesjinjthejmarketjtojselljtojthejojptionj
buyer.jIBMjisjnotjinvolvedjinjanyjway.jAnswersjB,jC,jandjDjarettrue.
3. Atone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthetstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysttwotcalljoptionsjan
djonejputjoption.jThejbreakevenjstockjpricejabovejwhichjthejtraderjmakesjajprofitjis
A. $35
B. $40
C. $30
D. $36
Answer:jA
Whenjthejstockjpricejisj$35,jthejtwojcalljoptionsjprovidejajpayoffjofj2×(35−30)jorj$10.jThetputjoptijonjpr
ovidesjnojpayoff.jThejtotaljcostjofjthejoptionsjist2×3+j4jorj$10.j ThejstockjpricejinjA,j$35,jistthejreforejthej
breakevenjstockjpricejabovejwhichjthejpositionjistprofitablejbecausetitjisjthetpricejforjwjhichjthejcostto
fjthejoptionsjequalsjthejpayoff.
4. Atone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthetstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysttwotcall
, optionsjandjonejputjoption.jThejbreakevenjstockjpricejbelowjwhichjthejtraderjmakesjajprofittis
A. $25
B. $28
C. $26
D. $20
Answer:jD
Whenjthetstockjpricejisj$20tthejtwojcalljoptionsjprovidejnojpayoff.jThetputtoptionjprovidesjajpayofjfjofj3
0−20jorj$10.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j ThejstockjpricejinjD,j$20,jisjthereforjejthejbreak
evenjstockjpricejbelowjwhichjthejpositionjisjprofitablejbecausejittisjthetpricejforjwhichjtjhejcostjofjthejo
ptionsjequalsjthejpayoff.
5. Whichjofjthejfollowingjisjapproximatelyjtruejwhenjsizejistmeasuredjinjtermsjofjthejunderlyingtprinjcip
aljamountsjorjvaluejofjthejunderlyingjassets
A. Thejexchange-tradedjmarketjisjtwicejasjbigtasjthejover-the-counterjmarket.
B. Thejover-the-counterjmarketjisjtwicejastbigjasjthetexchange-tradedjmarket.
C. Thejexchange-tradedjmarketjisjtenjtimesjastbigjasjthetover-the-counterjmarket.
D. Thejover-the-counterjmarketjisjtenjtimestasjbigjasjthejexchange-tradedjmarket.
Answer:jD
ThejOTCjmarketjisjaboutj$600jtrillionjwhereasjthejexchange-tradedjmarketjisjaboutj$60jtrillion.
6. Whichjofjthejfollowingjbestjdescribesjthejtermj“spotjprice”
A. Thejpricejforjimmediatejdelivery
B. Thejpricejforjdeliveryjatjajfuturejtime
C. Thejpricejofjanjassetjthatjhasjbeenjdamaged
D. Thejpricejofjrentingtanjasset
Answer:jA
Thejspotjpricejistthejpricejforjimmediatejdelivery.jThejfuturesjorjforwardjpricejisjthejpricejforjdelivjeryji
njthejfuture
7. Whichjofjthejfollowingjisjtruejaboutjajlongjforwardjcontract
A. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjdeclines
B. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassettrises
C. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjdeclinesjafterjthejcontractjhasjbeenjentejredji
nto
D. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjrisesjafterjthejcontractjhastbeenjenteredjinto
Answer:j B
Atlongjforwardjcontractjisjanjagreementjtojbuyjthejassettatjajpredeterminedjprice.jThejcontracttbejcom
esjmorejattractivejasjthejmarketjpricejofjthejassetjrises.jThejcontractjisjonlyjworthjzerojwhenjt
, hejpredeterminedjpricejinjthejforwardjcontractjequalstthejcurrentjforwardjpricej(asjitjusuallyjdoesjatjt
hejbeginningjofjthejcontract).
8. Anjinvestorjsellsjajfuturesjcontractjanjassetjwhenjthejfuturestpricejisj$1,500.jEachjcontractjisjonj10j0tuni
tsjofjthejasset.jThetcontractjisjclosedjoutjwhenjthejfuturestpricejisj$1,540.jWhichjofjthejfollowijngjisjtrue
A. Thejinvestorjhasjmadejajgainjofj$4,000
B. Thejinvestorjhasjmadejajlossjofj$4,000
C. Thejinvestorjhasjmadejajgainjofj$2,000
D. Thejinvestorjhasjmadejajlossjofj$2,000
Answer:jB
Anjinvestorjwhojbuysj(hasjajlongjposition)jhasjajgainjwhenjajfuturesjpricejincreases.jAnjinvestorjwjhotse
llst(hasjajshortjposition)jhasjajlossjwhenjajfuturesjpricejincreases.
9. WhichjofjthejfollowingjdescribesjEuropeanjoptions?
A. SoldjinjEurope
B. PricedjinjEuros
C. Exercisablejonlyjattmaturity
D. Callst(therejarejnojEuropeanjputs)
Answer:jC
Europeanjoptionstcanjbejexercisedjonlyjatjmaturity.jThisjisjinjcontrastjtojAmericanjoptionsjwhichjcjanjb
ejexercisedjatjanyjtime.jThettermj“European”jhasjnothingjtotdojwithjgeographicaljlocation,jcurjrencies,j
orjwhetherjthejoptionjisjajcalljorjajput.
10. WhichjofjthejfollowingjisjNOTjtruet
A. Atcalljoptionjgivesjthejholderjthejrightjtojbuyjanjassetjbyjajcertainjdatejforjajcertainjprice
B. Ajputjoptionjgivestthejholderjthejrightjtotselljanjassetjbyjajcertainjdatetforjajcertainjprice
C. Thejholderjofjajcalljorjputjoptionjmusttexercisejthejrightjtojselljorjbuyjanjasset
D. Thejholderjofjajforwardjcontractjisjobligatedjtojbuyjorjselljanjasset
Answer:jC
Thejholderjofjajcalljorjputjoptionjhasjthejrightjtojexercisejthetoptionjbuttisjnotjrequiredjtojdotso.jA,jB,jan
djCjarejcorrect
11. WhichjofjthejfollowingjisjNOTjtruetabouttcalljandjputtoptions:
A. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
B. AtEuropeanjoptionjcanjonlyjbejexercisedjonlyjonjthejmaturityjdate
C. Investorsjmustjpayjanjupfrontjpricej(thejoptionjpremium)jforjanjoptionjcontract
D. Thejpricejofjajcalljoptionjincreasesjastthejstrikejpricejincreases
, Answer:jD
Ajcalljoptionjisjthejoptionjtojbuyjforjthejstrikejprice.jAstthejstrikejpricejincreasesjthisjoptionjbecomjesjles
sjattractivejandjisjthereforejlesstvaluable.jA,jB,jandjCjarejtrue.
12. ThejpricejofjajstockjonjJulyj1jisj$57.jAjtraderjbuysj100jcalljoptionsjonjthetstockjwithjajstrikejpricetof
$60jwhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$65.jThejtrader’sjnetjp
rofitjis
A. $700
B. $500
C. $300
D. $600
Answer:jC
Thejpayoffjfromjthejoptionsjisj100×(65-
60)jorj$500.jThejcostjofjthetoptionsjisj2×100jorj$200.jThejnetjprofittisjthereforej500−200jorj$300.
13. ThejpricejofjajstocktonjFebruaryj1jisj$124.jAjtraderjsellsj200jputjoptionsjonjthejstockjwithjajstrikejprjicejofj
$120twhenjthejoptionjpricejisj$5.jThejoptionstarejexercisedjwhenjthejstockjpricejist$110.jThejtrader’sjn
ettprofitjorjlossjis
A. Gainjofj$1,000
B. Lossjofj$2,000
C. Lossjofj$2,800
D. Lossjofj$1,000
Answer:jD
Thejpayoffjthatjmustjbejmadejonjthejoptionsjisj200×(120−110)jorj$2000.jThejamountjreceivedjforjthej
optionsjisj5×200jorj$1000.jThejnetjlosstisjthereforej2000−1000jorj$1000.
14. ThejpricejofjajstocktonjFebruaryj1jisj$84.jAttraderjbuyst200jputjoptionsjonjthejstockjwithjajstrikejprijcejofj$
90twhenjthejoptionjpricejisj$10.jThejoptionsjarejexercisedjwhenjthejstocktpricejisj$85.jThejtrjader’sjnetj
profitjorjlossjis
A. Lossjofj$1,000
B. Lossjofj$2,000
C. Gainjofj$200
D. Gainjofj$1000
Answer:jA
Thejpayoffjisj90−85jorj$5jperjoption.jForj200toptionsjthejpayoffjisjthereforej5×200jorj$1000.jHowejverjt
hejoptionsjcostj10×200torj$2000.jTherejisjthereforejajnetjlossjofj$1000.
15. ThejpricejofjajstockjonjFebruaryj1jisj$48.jAttraderjsellsj200jputjoptionstonjthejstockjwithjajstrikejprijcejofj$
40twhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$39.jThejtrajder’sjnetjpr
ofitjorjlossjis
A. Lossjofj$800
apterj1:jIntroduction
MultipletChoicejTestjBank:jQuestionsjwithjAnswers
1. Ajone-yearjforwardjcontractjisjanjagreementjwhere
A. Onejsidejhasjthejrightttojbuyjanjassettforjajcertainjpricejinjonejyear’sjtime.
B. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejinjonejyear’sjtime.
C. Onejsidejhasjthejobligationjtojbuyjanjassetjforjajcertainjpricejatjsomejtimejduringjthejnextjyear.
D. Onejsidejhasjthejobligationjtojbuyjanjassetjforjthetmarketjpricejinjonejyear’sjtime.
Answer:jB
Atone-
yearjforwardjcontractjisjanjobligationjtojbuyjorjselljinjonejyear’sjtimejforjajpredeterminedjprice.jByjcont
rast,janjoptionjisjthejrightjtojbuyjorjsell.
2. WhichjofjthejfollowingjisjNOTjtrue
A. WhenjajCBOEjcalljoptionjonjIBMjisjexercised,jIBMjissuesjmorejstock
B. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlifet
C. Anjcalljoptionjwilljalwaysjbejexercisedjattmaturityjifjthejunderlyingjassetjpricejisjgreaterjthjanjt
hejstrikejprice
D. Ajputjoptionjwilljalwaysjbejexercisedjatjmaturityjifjthejstrikejpricejisjgreaterjthanjthejunderjlying
jassetjprice.
Answer:jA
WhenjanjIBMjcalljoptionjisjexercisedjthejoptionjsellerjmustjbuyjsharesjinjthejmarketjtojselljtojthejojptionj
buyer.jIBMjisjnotjinvolvedjinjanyjway.jAnswersjB,jC,jandjDjarettrue.
3. Atone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthetstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysttwotcalljoptionsjan
djonejputjoption.jThejbreakevenjstockjpricejabovejwhichjthejtraderjmakesjajprofitjis
A. $35
B. $40
C. $30
D. $36
Answer:jA
Whenjthejstockjpricejisj$35,jthejtwojcalljoptionsjprovidejajpayoffjofj2×(35−30)jorj$10.jThetputjoptijonjpr
ovidesjnojpayoff.jThejtotaljcostjofjthejoptionsjist2×3+j4jorj$10.j ThejstockjpricejinjA,j$35,jistthejreforejthej
breakevenjstockjpricejabovejwhichjthejpositionjistprofitablejbecausetitjisjthetpricejforjwjhichjthejcostto
fjthejoptionsjequalsjthejpayoff.
4. Atone-yearjcalljoptionjonjajstockjwithjajstrikejpricejofj$30jcostsj$3;jajone-
yearjputjoptionjonjthetstockjwithjajstrikejpricejofj$30jcostsj$4.jSupposejthatjajtraderjbuysttwotcall
, optionsjandjonejputjoption.jThejbreakevenjstockjpricejbelowjwhichjthejtraderjmakesjajprofittis
A. $25
B. $28
C. $26
D. $20
Answer:jD
Whenjthetstockjpricejisj$20tthejtwojcalljoptionsjprovidejnojpayoff.jThetputtoptionjprovidesjajpayofjfjofj3
0−20jorj$10.jThejtotaljcostjofjthejoptionsjisj2×3+j4jorj$10.j ThejstockjpricejinjD,j$20,jisjthereforjejthejbreak
evenjstockjpricejbelowjwhichjthejpositionjisjprofitablejbecausejittisjthetpricejforjwhichjtjhejcostjofjthejo
ptionsjequalsjthejpayoff.
5. Whichjofjthejfollowingjisjapproximatelyjtruejwhenjsizejistmeasuredjinjtermsjofjthejunderlyingtprinjcip
aljamountsjorjvaluejofjthejunderlyingjassets
A. Thejexchange-tradedjmarketjisjtwicejasjbigtasjthejover-the-counterjmarket.
B. Thejover-the-counterjmarketjisjtwicejastbigjasjthetexchange-tradedjmarket.
C. Thejexchange-tradedjmarketjisjtenjtimesjastbigjasjthetover-the-counterjmarket.
D. Thejover-the-counterjmarketjisjtenjtimestasjbigjasjthejexchange-tradedjmarket.
Answer:jD
ThejOTCjmarketjisjaboutj$600jtrillionjwhereasjthejexchange-tradedjmarketjisjaboutj$60jtrillion.
6. Whichjofjthejfollowingjbestjdescribesjthejtermj“spotjprice”
A. Thejpricejforjimmediatejdelivery
B. Thejpricejforjdeliveryjatjajfuturejtime
C. Thejpricejofjanjassetjthatjhasjbeenjdamaged
D. Thejpricejofjrentingtanjasset
Answer:jA
Thejspotjpricejistthejpricejforjimmediatejdelivery.jThejfuturesjorjforwardjpricejisjthejpricejforjdelivjeryji
njthejfuture
7. Whichjofjthejfollowingjisjtruejaboutjajlongjforwardjcontract
A. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassetjdeclines
B. Thejcontractjbecomesjmorejvaluablejasjthejpricejofjthejassettrises
C. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjdeclinesjafterjthejcontractjhasjbeenjentejredji
nto
D. Thejcontractjisjworthjzerojifjthejpricejofjthejassetjrisesjafterjthejcontractjhastbeenjenteredjinto
Answer:j B
Atlongjforwardjcontractjisjanjagreementjtojbuyjthejassettatjajpredeterminedjprice.jThejcontracttbejcom
esjmorejattractivejasjthejmarketjpricejofjthejassetjrises.jThejcontractjisjonlyjworthjzerojwhenjt
, hejpredeterminedjpricejinjthejforwardjcontractjequalstthejcurrentjforwardjpricej(asjitjusuallyjdoesjatjt
hejbeginningjofjthejcontract).
8. Anjinvestorjsellsjajfuturesjcontractjanjassetjwhenjthejfuturestpricejisj$1,500.jEachjcontractjisjonj10j0tuni
tsjofjthejasset.jThetcontractjisjclosedjoutjwhenjthejfuturestpricejisj$1,540.jWhichjofjthejfollowijngjisjtrue
A. Thejinvestorjhasjmadejajgainjofj$4,000
B. Thejinvestorjhasjmadejajlossjofj$4,000
C. Thejinvestorjhasjmadejajgainjofj$2,000
D. Thejinvestorjhasjmadejajlossjofj$2,000
Answer:jB
Anjinvestorjwhojbuysj(hasjajlongjposition)jhasjajgainjwhenjajfuturesjpricejincreases.jAnjinvestorjwjhotse
llst(hasjajshortjposition)jhasjajlossjwhenjajfuturesjpricejincreases.
9. WhichjofjthejfollowingjdescribesjEuropeanjoptions?
A. SoldjinjEurope
B. PricedjinjEuros
C. Exercisablejonlyjattmaturity
D. Callst(therejarejnojEuropeanjputs)
Answer:jC
Europeanjoptionstcanjbejexercisedjonlyjatjmaturity.jThisjisjinjcontrastjtojAmericanjoptionsjwhichjcjanjb
ejexercisedjatjanyjtime.jThettermj“European”jhasjnothingjtotdojwithjgeographicaljlocation,jcurjrencies,j
orjwhetherjthejoptionjisjajcalljorjajput.
10. WhichjofjthejfollowingjisjNOTjtruet
A. Atcalljoptionjgivesjthejholderjthejrightjtojbuyjanjassetjbyjajcertainjdatejforjajcertainjprice
B. Ajputjoptionjgivestthejholderjthejrightjtotselljanjassetjbyjajcertainjdatetforjajcertainjprice
C. Thejholderjofjajcalljorjputjoptionjmusttexercisejthejrightjtojselljorjbuyjanjasset
D. Thejholderjofjajforwardjcontractjisjobligatedjtojbuyjorjselljanjasset
Answer:jC
Thejholderjofjajcalljorjputjoptionjhasjthejrightjtojexercisejthetoptionjbuttisjnotjrequiredjtojdotso.jA,jB,jan
djCjarejcorrect
11. WhichjofjthejfollowingjisjNOTjtruetabouttcalljandjputtoptions:
A. AnjAmericanjoptionjcanjbejexercisedjatjanyjtimejduringjitsjlife
B. AtEuropeanjoptionjcanjonlyjbejexercisedjonlyjonjthejmaturityjdate
C. Investorsjmustjpayjanjupfrontjpricej(thejoptionjpremium)jforjanjoptionjcontract
D. Thejpricejofjajcalljoptionjincreasesjastthejstrikejpricejincreases
, Answer:jD
Ajcalljoptionjisjthejoptionjtojbuyjforjthejstrikejprice.jAstthejstrikejpricejincreasesjthisjoptionjbecomjesjles
sjattractivejandjisjthereforejlesstvaluable.jA,jB,jandjCjarejtrue.
12. ThejpricejofjajstockjonjJulyj1jisj$57.jAjtraderjbuysj100jcalljoptionsjonjthetstockjwithjajstrikejpricetof
$60jwhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$65.jThejtrader’sjnetjp
rofitjis
A. $700
B. $500
C. $300
D. $600
Answer:jC
Thejpayoffjfromjthejoptionsjisj100×(65-
60)jorj$500.jThejcostjofjthetoptionsjisj2×100jorj$200.jThejnetjprofittisjthereforej500−200jorj$300.
13. ThejpricejofjajstocktonjFebruaryj1jisj$124.jAjtraderjsellsj200jputjoptionsjonjthejstockjwithjajstrikejprjicejofj
$120twhenjthejoptionjpricejisj$5.jThejoptionstarejexercisedjwhenjthejstockjpricejist$110.jThejtrader’sjn
ettprofitjorjlossjis
A. Gainjofj$1,000
B. Lossjofj$2,000
C. Lossjofj$2,800
D. Lossjofj$1,000
Answer:jD
Thejpayoffjthatjmustjbejmadejonjthejoptionsjisj200×(120−110)jorj$2000.jThejamountjreceivedjforjthej
optionsjisj5×200jorj$1000.jThejnetjlosstisjthereforej2000−1000jorj$1000.
14. ThejpricejofjajstocktonjFebruaryj1jisj$84.jAttraderjbuyst200jputjoptionsjonjthejstockjwithjajstrikejprijcejofj$
90twhenjthejoptionjpricejisj$10.jThejoptionsjarejexercisedjwhenjthejstocktpricejisj$85.jThejtrjader’sjnetj
profitjorjlossjis
A. Lossjofj$1,000
B. Lossjofj$2,000
C. Gainjofj$200
D. Gainjofj$1000
Answer:jA
Thejpayoffjisj90−85jorj$5jperjoption.jForj200toptionsjthejpayoffjisjthereforej5×200jorj$1000.jHowejverjt
hejoptionsjcostj10×200torj$2000.jTherejisjthereforejajnetjlossjofj$1000.
15. ThejpricejofjajstockjonjFebruaryj1jisj$48.jAttraderjsellsj200jputjoptionstonjthejstockjwithjajstrikejprijcejofj$
40twhenjthejoptionjpricejisj$2.jThejoptionsjarejexercisedjwhenjthejstockjpricejisj$39.jThejtrajder’sjnetjpr
ofitjorjlossjis
A. Lossjofj$800
