Solution Manual Options Futures
Question 1
Which of the following is NOT a characteristic of options?
A) The holder of a call option has the right, but not the obligation, to buy the
underlying asset at a specified price.
B) The holder of a put option has the right, but not the obligation, to sell the
underlying asset at a specified price.
C) The seller of an option has the right, but not the obligation, to buy or sell the
underlying asset at a specified price.
,D) The price at which the underlying asset can be bought or sold is called the strike
price.
Answer: C) The seller of an option has the right, but not the obligation, to buy or sell
the underlying asset at a specified price.
Rationale: The seller of an option (also known as the writer) has the obligation, not
the right, to buy or sell the underlying asset if the holder chooses to exercise the
option.
Question 2
What is the primary purpose of hedging using futures contracts?
A) To speculate on the price movements of the underlying asset.
B) To eliminate or reduce the risk of adverse price movements in an asset.
C) To leverage investment returns by borrowing money.
D) To gain exposure to a new market or asset class.
Answer: B) To eliminate or reduce the risk of adverse price movements in an asset.
Rationale: Hedging is primarily used to reduce or eliminate the risk of adverse price
movements in an asset, protecting against potential losses.
Question 3
In the Black-Scholes model, which of the following variables is NOT used to
determine the price of a European call option?
A) The current price of the underlying asset.
,B) The strike price of the option.
C) The volatility of the underlying asset.
D) The dividends paid by the underlying asset.
Answer: D) The dividends paid by the underlying asset.
Rationale: The Black-Scholes model assumes that the underlying asset does not pay
dividends. Adjustments are made to the model if dividends are expected.
Question 4
What is a "put-call parity" relationship in options trading?
A) A formula that relates the price of a call option, a put option, and the underlying
asset.
B) The condition where the price of a call option is equal to the price of a put option.
C) A strategy involving the purchase of both a call and a put option on the same
underlying asset.
D) A condition where the price of a call option and the price of a put option are
always equal.
Answer: A) A formula that relates the price of a call option, a put option, and the
underlying asset.
Rationale: Put-call parity is a financial principle that defines a relationship between
the price of a European call option, a European put option, and the underlying asset,
helping to identify arbitrage opportunities.
, Question 5
Which of the following best describes a "straddle" options strategy?
A) Buying a call and a put option with the same strike price and expiration date.
B) Selling a call and a put option with different strike prices and expiration dates.
C) Buying a call option and selling a put option with different strike prices.
D) Selling a call option and buying a put option with the same strike price.
Answer: A) Buying a call and a put option with the same strike price and expiration
date.
Rationale: A straddle involves buying both a call option and a put option with the
same strike price and expiration date, allowing the investor to profit from significant
price movements in either direction.Question 6
Which of the following best describes an "arbitrage opportunity" in financial
markets?
A) A chance to buy and sell the same asset simultaneously to lock in a profit.
B) A strategy to hedge against price movements in the market.
C) An opportunity to speculate on future price movements of an asset.
D) A method of managing risk by diversifying investments.
Answer: A) A chance to buy and sell the same asset simultaneously to lock in a profit.
Question 1
Which of the following is NOT a characteristic of options?
A) The holder of a call option has the right, but not the obligation, to buy the
underlying asset at a specified price.
B) The holder of a put option has the right, but not the obligation, to sell the
underlying asset at a specified price.
C) The seller of an option has the right, but not the obligation, to buy or sell the
underlying asset at a specified price.
,D) The price at which the underlying asset can be bought or sold is called the strike
price.
Answer: C) The seller of an option has the right, but not the obligation, to buy or sell
the underlying asset at a specified price.
Rationale: The seller of an option (also known as the writer) has the obligation, not
the right, to buy or sell the underlying asset if the holder chooses to exercise the
option.
Question 2
What is the primary purpose of hedging using futures contracts?
A) To speculate on the price movements of the underlying asset.
B) To eliminate or reduce the risk of adverse price movements in an asset.
C) To leverage investment returns by borrowing money.
D) To gain exposure to a new market or asset class.
Answer: B) To eliminate or reduce the risk of adverse price movements in an asset.
Rationale: Hedging is primarily used to reduce or eliminate the risk of adverse price
movements in an asset, protecting against potential losses.
Question 3
In the Black-Scholes model, which of the following variables is NOT used to
determine the price of a European call option?
A) The current price of the underlying asset.
,B) The strike price of the option.
C) The volatility of the underlying asset.
D) The dividends paid by the underlying asset.
Answer: D) The dividends paid by the underlying asset.
Rationale: The Black-Scholes model assumes that the underlying asset does not pay
dividends. Adjustments are made to the model if dividends are expected.
Question 4
What is a "put-call parity" relationship in options trading?
A) A formula that relates the price of a call option, a put option, and the underlying
asset.
B) The condition where the price of a call option is equal to the price of a put option.
C) A strategy involving the purchase of both a call and a put option on the same
underlying asset.
D) A condition where the price of a call option and the price of a put option are
always equal.
Answer: A) A formula that relates the price of a call option, a put option, and the
underlying asset.
Rationale: Put-call parity is a financial principle that defines a relationship between
the price of a European call option, a European put option, and the underlying asset,
helping to identify arbitrage opportunities.
, Question 5
Which of the following best describes a "straddle" options strategy?
A) Buying a call and a put option with the same strike price and expiration date.
B) Selling a call and a put option with different strike prices and expiration dates.
C) Buying a call option and selling a put option with different strike prices.
D) Selling a call option and buying a put option with the same strike price.
Answer: A) Buying a call and a put option with the same strike price and expiration
date.
Rationale: A straddle involves buying both a call option and a put option with the
same strike price and expiration date, allowing the investor to profit from significant
price movements in either direction.Question 6
Which of the following best describes an "arbitrage opportunity" in financial
markets?
A) A chance to buy and sell the same asset simultaneously to lock in a profit.
B) A strategy to hedge against price movements in the market.
C) An opportunity to speculate on future price movements of an asset.
D) A method of managing risk by diversifying investments.
Answer: A) A chance to buy and sell the same asset simultaneously to lock in a profit.
