Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 17: Options on Stock Indices and Currencies
Multiple Choice Test Bank: Questions with Answers
1. Which of the following describes what a company should do to create a range forward
contract in order to hedge foreign currency that will be received?
A. Buy a put and sell a call on the currency with the strike price of the put higher
than that of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than
that of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher
than that of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than
that of the call
Answer: B
The company wants to ensure that the price received for the foreign currency will be
between K1 and K2. It does this by buying a put option with strike price K1 and selling
a call option with strike price K2.
2. Which of the following describes what a company should do to create a range forward
contract in order to hedge foreign currency that will be paid?
A. Buy a put and sell a call on the currency with the strike price of the put higher
than that of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than
that of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher
than that of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than
that of the call
Answer: D
The company wants to ensure that the price paid for the foreign currency will be
between K1 and K2. It does this by selling a put option with strike price K1 and buying
a call option with strike price K2.
3. What should the continuous dividend yield be replaced by when options on an exchange
rate are valued using the formula for an option on a stock paying a continuous dividend
yield?
A. The domestic risk-free rate
B. The foreign risk-free rate
C. The foreign risk-free rate minus the domestic risk-free rate
D. None of the above
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, Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 17: Options on Stock Indices and Currencies
Multiple Choice Test Bank: Questions with Answers
Answer: B
The continuous dividend yield, q, should be replaced by the foreign risk rate, rf.
4. Suppose that the domestic risk free rate is r and dividend yield on an index is q. How
should the put-call parity formula for options on a non-dividend-paying stock be changed
to provide a put-call parity formula for options on a stock index? Assume the options last
T years.
A. The stock price is replaced by the value of the index multiplied by exp(qT)
B. The stock price is replaced by the value of the index multiplied by exp(rT)
C. The stock price is replaced by the value of the index multiplied by exp(-qT)
D. The stock price is replaced by the value of the index multiplied by exp(-rT)
Answer: C
S0 is replaced by S0e-qT.
5. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock
prices might decline rapidly during the next six months and would like to use put options
on an index to provide protection against the portfolio falling below $9.5 million. The index
is currently standing at 500 and each contract is on 100 times the index. What position is
required if the portfolio has a beta of 1?
A. Short 200 contracts
B. Long 200 contracts
C. Short 100 contracts
D. Long 100 contracts
Answer: B
The number of contracts required is 10,000,000/(500×100)=200. A long put position
is required because the contracts must provide a positive payoff when the market
declines.
6. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an
index to provide protection against the portfolio falling below $9.5 million. The index is
currently standing at 500 and each contract is on 100 times the index. What should the
strike price of options on the index be the portfolio has a beta of 1?
A. 425
B. 450
C. 475
D. 500
Answer: C
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Chapter 17: Options on Stock Indices and Currencies
Multiple Choice Test Bank: Questions with Answers
1. Which of the following describes what a company should do to create a range forward
contract in order to hedge foreign currency that will be received?
A. Buy a put and sell a call on the currency with the strike price of the put higher
than that of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than
that of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher
than that of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than
that of the call
Answer: B
The company wants to ensure that the price received for the foreign currency will be
between K1 and K2. It does this by buying a put option with strike price K1 and selling
a call option with strike price K2.
2. Which of the following describes what a company should do to create a range forward
contract in order to hedge foreign currency that will be paid?
A. Buy a put and sell a call on the currency with the strike price of the put higher
than that of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than
that of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher
than that of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than
that of the call
Answer: D
The company wants to ensure that the price paid for the foreign currency will be
between K1 and K2. It does this by selling a put option with strike price K1 and buying
a call option with strike price K2.
3. What should the continuous dividend yield be replaced by when options on an exchange
rate are valued using the formula for an option on a stock paying a continuous dividend
yield?
A. The domestic risk-free rate
B. The foreign risk-free rate
C. The foreign risk-free rate minus the domestic risk-free rate
D. None of the above
/
, Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 17: Options on Stock Indices and Currencies
Multiple Choice Test Bank: Questions with Answers
Answer: B
The continuous dividend yield, q, should be replaced by the foreign risk rate, rf.
4. Suppose that the domestic risk free rate is r and dividend yield on an index is q. How
should the put-call parity formula for options on a non-dividend-paying stock be changed
to provide a put-call parity formula for options on a stock index? Assume the options last
T years.
A. The stock price is replaced by the value of the index multiplied by exp(qT)
B. The stock price is replaced by the value of the index multiplied by exp(rT)
C. The stock price is replaced by the value of the index multiplied by exp(-qT)
D. The stock price is replaced by the value of the index multiplied by exp(-rT)
Answer: C
S0 is replaced by S0e-qT.
5. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock
prices might decline rapidly during the next six months and would like to use put options
on an index to provide protection against the portfolio falling below $9.5 million. The index
is currently standing at 500 and each contract is on 100 times the index. What position is
required if the portfolio has a beta of 1?
A. Short 200 contracts
B. Long 200 contracts
C. Short 100 contracts
D. Long 100 contracts
Answer: B
The number of contracts required is 10,000,000/(500×100)=200. A long put position
is required because the contracts must provide a positive payoff when the market
declines.
6. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an
index to provide protection against the portfolio falling below $9.5 million. The index is
currently standing at 500 and each contract is on 100 times the index. What should the
strike price of options on the index be the portfolio has a beta of 1?
A. 425
B. 450
C. 475
D. 500
Answer: C
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