,ACCESS Test Bank for Options Futures and Other Derivatives 11th Edition
Hull
Hull:32Options,32Futures,32and32Other32Derivatives,32Eleventh32Editio
n32Chapter321:32Introduction
Multiple32Choice32Test32Bank:32Questions32with32Answers
1. A32one-year32forward32contract32is32an32agreement32where:
A. One32side32has32the32right32to32buy32an32asset32for32a32certain32price32in32one32year’s32
time.
B. One32side32has32the32obligation32to32buy32an32asset32for32a32certain32price32in32one32ye
ar’s32time.
C. One32side32has32the32obligation32to32buy32an32asset32for32a32certain32price32at32som
e32time32during32the32next32year.
D. One32side32has32the32obligation32to32buy32an32asset32for32the32market32price32in32one32
year’s32time.
Answer:32B
A32one-
year32forward32contract32is32an32obligation32to32buy32or32sell32in32one32year’s32time32for32a
predetermined32price.32By32contrast,32an32option32is32the32right32to32buy32or32sell.
2. Which32of32the32following32is32NOT32true?
A. When32a32CBOE32call32option32on32IBM32is32exercised,32IBM32issues32more32stock.
B. An32American32option32can32be32exercised32at32any32time32during32its32life.
C. A32call32option32will32always32be32exercised32at32maturity32if32the32underlying32asset32
price32is32greater32than32the32strike32price.
D. A32put32option32will32always32be32exercised32at32maturity32if32the32strike32price32is3
2greater32than32the32underlying32asset32price.
Answer:32A
When32an32IBM32call32option32is32exercised,32the32option32seller32must32buy32shares32in32the32
market32to32sell32to32the32option32buyer.32IBM32is32not32involved32in32any32way.32Answers32B,
32C,32and32D32are32true.
A32one-
year32call32option32on32a32stock32with32a32strike32price32of32$3032costs32$3;32a32
one-
year32put32option32on3 2 the32stock32with32a32strike32price32of32$3032costs32$4.32
Suppose32that32a32trader32buys32two32call32options32and32one32put32option.32The
32breakeven32stock32price32above32which32the32trader32makes32a32profit32is:
E. $35
F. $40
G. $30
H. $36
Answer:32A
When32the32stock32price32is32$35,32the32two32call32options32provide32a32payoff32of32232 ×32(35
32−3230)32or32$10.32The32put32option32provides32no32payoff.32The32total32cost32of32the32option
s32is32232×32332+32432or32$10.3 2 The32stock32price32in32A,32$35,32is32therefore32the32breakeven3
mynursytest.store
,ACCESS Test Bank for Options Futures and Other Derivatives 11th Edition
Hull
2stock32price32above32which32the32position32is32profitable32because32it32is32the32price32for32wh
ich32the32cost32of32the32options32equals32the32payoff.
3. A32one-year32call32option32on32a32stock32with32a32strike32price32of32$3032costs32$3;32a32one-
year32put32option32on3 2 the32stock32with32a32strike32price32of32$3032costs32$4.32Suppose32tha
t32a32trader32buys32two32call32options32and32one
mynursytest.store
, ACCESS Test Bank for Options Futures and Other Derivatives 11th Edition
Hull
put32option.32The32breakeven32stock32price32below32which32the32trader32makes32a32profit32is:
A. $25
B. $28
C. $26
D. $20
Answer:32D
When32the32stock32price32is32$20,32the32two32call32options32provide32no32payoff.32The32put32o
ption32provides32a32payoff32of323032−322032or32$10.32The32total32cost32of32the32options32is32232
×32332+32432or32$10.3 2 The32stock32price32in32D,
$20,32is32therefore32the32breakeven32stock32price32below32which32the32position32is32profitable3
2because32it32is32the32price32for32which32the32cost32of32the32options32equals32the32payoff.
4. Which32of32the32following32is32approximately32true32when32size32is32measured32in32terms32of3
2the32underlying32principal32amounts32or32value32of32the32underlying32assets?
A. The32exchange-traded32market32is32twice32as32big32as32the32over-the-counter32market.
B. The32over-the-counter32market32is32twice32as32big32as32the32exchange-traded32market.
C. The32exchange-traded32market32is32about32ten32times32as32big32as32the32over-the-
counter32market.
D. The32over-the-counter32market32is32about32ten32times32as32big32as32the32exchange-
traded32market.
Answer:32D
The32over-the-counter32market32is32about32$60032trillion32whereas32the32exchange-
traded32market32is32about32$6032trillion.
5. Which32of32the32following32best32describes32the32term32“spot32price”?
A. The32price32for32immediate32delivery.
B. The32price32for32delivery32at32a32future32time.
C. The32price32of32an32asset32that32has32been32damaged.
D. The32price32of32renting32an32asset.
Answer:32A
The32spot32price32is32the32price32for32immediate32delivery.32The3232or32forward32price32is32the
32price32for3 2 delivery32in32the32future.
6. Which32of32the32following32is32true32about32a32long32forward32contract?
A. The32contract32becomes32more32valuable32as32the32price32of32the32asset32declines.
B. The32contract32becomes32more32valuable32as32the32price32of32the32asset32rises.
C. The32contract32is32worth32zero32if32the32price32of32the32asset32declines32after32the32co
ntract32has32been32entered32into.
D. The3 2 contract3 2 is3 2 worth3 2 zero3 2 if3 2 the3 2 price3 2 of3 2 the3 2 asset3 2 rises3 2 after3 2 th
e3 2 contract3 2 has3 2 been32entered32into.
Answer:3 2 B
mynursytest.store
Hull
Hull:32Options,32Futures,32and32Other32Derivatives,32Eleventh32Editio
n32Chapter321:32Introduction
Multiple32Choice32Test32Bank:32Questions32with32Answers
1. A32one-year32forward32contract32is32an32agreement32where:
A. One32side32has32the32right32to32buy32an32asset32for32a32certain32price32in32one32year’s32
time.
B. One32side32has32the32obligation32to32buy32an32asset32for32a32certain32price32in32one32ye
ar’s32time.
C. One32side32has32the32obligation32to32buy32an32asset32for32a32certain32price32at32som
e32time32during32the32next32year.
D. One32side32has32the32obligation32to32buy32an32asset32for32the32market32price32in32one32
year’s32time.
Answer:32B
A32one-
year32forward32contract32is32an32obligation32to32buy32or32sell32in32one32year’s32time32for32a
predetermined32price.32By32contrast,32an32option32is32the32right32to32buy32or32sell.
2. Which32of32the32following32is32NOT32true?
A. When32a32CBOE32call32option32on32IBM32is32exercised,32IBM32issues32more32stock.
B. An32American32option32can32be32exercised32at32any32time32during32its32life.
C. A32call32option32will32always32be32exercised32at32maturity32if32the32underlying32asset32
price32is32greater32than32the32strike32price.
D. A32put32option32will32always32be32exercised32at32maturity32if32the32strike32price32is3
2greater32than32the32underlying32asset32price.
Answer:32A
When32an32IBM32call32option32is32exercised,32the32option32seller32must32buy32shares32in32the32
market32to32sell32to32the32option32buyer.32IBM32is32not32involved32in32any32way.32Answers32B,
32C,32and32D32are32true.
A32one-
year32call32option32on32a32stock32with32a32strike32price32of32$3032costs32$3;32a32
one-
year32put32option32on3 2 the32stock32with32a32strike32price32of32$3032costs32$4.32
Suppose32that32a32trader32buys32two32call32options32and32one32put32option.32The
32breakeven32stock32price32above32which32the32trader32makes32a32profit32is:
E. $35
F. $40
G. $30
H. $36
Answer:32A
When32the32stock32price32is32$35,32the32two32call32options32provide32a32payoff32of32232 ×32(35
32−3230)32or32$10.32The32put32option32provides32no32payoff.32The32total32cost32of32the32option
s32is32232×32332+32432or32$10.3 2 The32stock32price32in32A,32$35,32is32therefore32the32breakeven3
mynursytest.store
,ACCESS Test Bank for Options Futures and Other Derivatives 11th Edition
Hull
2stock32price32above32which32the32position32is32profitable32because32it32is32the32price32for32wh
ich32the32cost32of32the32options32equals32the32payoff.
3. A32one-year32call32option32on32a32stock32with32a32strike32price32of32$3032costs32$3;32a32one-
year32put32option32on3 2 the32stock32with32a32strike32price32of32$3032costs32$4.32Suppose32tha
t32a32trader32buys32two32call32options32and32one
mynursytest.store
, ACCESS Test Bank for Options Futures and Other Derivatives 11th Edition
Hull
put32option.32The32breakeven32stock32price32below32which32the32trader32makes32a32profit32is:
A. $25
B. $28
C. $26
D. $20
Answer:32D
When32the32stock32price32is32$20,32the32two32call32options32provide32no32payoff.32The32put32o
ption32provides32a32payoff32of323032−322032or32$10.32The32total32cost32of32the32options32is32232
×32332+32432or32$10.3 2 The32stock32price32in32D,
$20,32is32therefore32the32breakeven32stock32price32below32which32the32position32is32profitable3
2because32it32is32the32price32for32which32the32cost32of32the32options32equals32the32payoff.
4. Which32of32the32following32is32approximately32true32when32size32is32measured32in32terms32of3
2the32underlying32principal32amounts32or32value32of32the32underlying32assets?
A. The32exchange-traded32market32is32twice32as32big32as32the32over-the-counter32market.
B. The32over-the-counter32market32is32twice32as32big32as32the32exchange-traded32market.
C. The32exchange-traded32market32is32about32ten32times32as32big32as32the32over-the-
counter32market.
D. The32over-the-counter32market32is32about32ten32times32as32big32as32the32exchange-
traded32market.
Answer:32D
The32over-the-counter32market32is32about32$60032trillion32whereas32the32exchange-
traded32market32is32about32$6032trillion.
5. Which32of32the32following32best32describes32the32term32“spot32price”?
A. The32price32for32immediate32delivery.
B. The32price32for32delivery32at32a32future32time.
C. The32price32of32an32asset32that32has32been32damaged.
D. The32price32of32renting32an32asset.
Answer:32A
The32spot32price32is32the32price32for32immediate32delivery.32The3232or32forward32price32is32the
32price32for3 2 delivery32in32the32future.
6. Which32of32the32following32is32true32about32a32long32forward32contract?
A. The32contract32becomes32more32valuable32as32the32price32of32the32asset32declines.
B. The32contract32becomes32more32valuable32as32the32price32of32the32asset32rises.
C. The32contract32is32worth32zero32if32the32price32of32the32asset32declines32after32the32co
ntract32has32been32entered32into.
D. The3 2 contract3 2 is3 2 worth3 2 zero3 2 if3 2 the3 2 price3 2 of3 2 the3 2 asset3 2 rises3 2 after3 2 th
e3 2 contract3 2 has3 2 been32entered32into.
Answer:3 2 B
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