CHAPTER 1
Test Bank
1. List three types of traders in futures, forward, and options markets
(i) .................
(ii) ................
(iii) ...............
2. Which of the following is not true (circle one)
(a) When a CBOE 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.
3. A trader enters into a one-year short forward contract to sell an asset for $60 when the spot price is
$58. The spot price in one year proves to be $63. What is the trader's gain or loss? ..............
4. A trader buys 100 European call options with a strike price of $20 and a time to maturity of one year.
The cost of each option is $2. The price of the underlying asset proves to be $25 in one year. What is the
trader's gain or loss? ............
5. A trader sells 100 European put options with a strike price of $50 and a time to maturity of six
months. The price received for each option is $4. The price of the underlying asset is $41 in six months.
What is the trader's gain or loss? ………
6. The price of a stock is $36 and the price of a three-month call option on the stock with a strike price of
$36 is $3.60. Suppose a trader has $3,600 to invest and is trying to choose between buying 1,000
,options and 100 shares of stock. How high does the stock price have to rise for an investment in options
to be as profitable as an investment in the stock? ………..
7. 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.
(i) What is the breakeven stock price, above which the trader makes a profit? ……….
(ii) What is the breakeven stock price below which the trader makes a profit? ……….
, CHAPTER 2
Test Bank
1. Which of the following is true (circle one)
(a) Both forward and futures contracts are traded on exchanges.
(b) Forward contracts are traded on exchanges, but futures contracts are not.
(c) Futures contracts are traded on exchanges, but forward contracts are not.
(d) Neither futures contracts nor forward contracts are traded on exchanges.
2. Which of the following is not true (circle one)
(a) Futures contracts nearly always last longer than forward contracts
(b) Futures contracts are standardized; forward contracts are not.
(c) Delivery or final cash settlement usually takes place with forward contracts; the same is not true of
futures contracts.
(d) Forward contract usually have one specified delivery date; futures contract often have a range of
delivery dates.
3. In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery locations. Which of
the following is true (circle one)
(a) This flexibility tends increase the futures price.
(b) This flexibility tends decrease the futures price.
(c) This flexibility may increase and may decrease the futures price.
(d) This has no effect on the futures price
4. A company enters into a short futures contract to sell 50,000 pounds of cotton for 70 cents per
pound. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price
above which there will be a margin call? ………..
, 5. A company enters into a long futures contract to buy 1,000 units of a commodity for $20 per unit. The
initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be
withdrawn from the margin account? …………..
6. On the floor of a futures exchange one futures contract is traded where both the long and short
parties are closing out existing positions. What is the resultant change in the open interest? …………….
7. Who determines when delivery will take place in a corn futures contract (circle one)
(a) The party with the long position
(b) The party with the short position
(c) Either party can specify a delivery date
(d) The exchange specifies the exact delivery date.
8. You sell three December gold futures contracts when the futures price is $410 per ounce. Each
contract is on 100 ounces of gold and the initial margin per contract is $2,000. The maintenance margin
per contract is $1,500. During the next seven days the futures price rises slowly to $412 per ounce.
What is the balance of your margin account at the end of the seven days?
9. A hedger takes a long position in a futures contract on November 1, 2009 to hedge an exposure on
March 1, 2010. The initial futures price is $20. On December 31, 2009 the futures price is $21. On March
1, 2010 it is $24. The contract is closed out on March 1, 2010. What gain is recognized in the accounting
year January 1 to December 31, 2010? Each contract is on 1000 units of the commodity………
10. What is your answer to question 9 if the trader is a speculator rather than a hedger? …………
Test Bank
1. List three types of traders in futures, forward, and options markets
(i) .................
(ii) ................
(iii) ...............
2. Which of the following is not true (circle one)
(a) When a CBOE 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.
3. A trader enters into a one-year short forward contract to sell an asset for $60 when the spot price is
$58. The spot price in one year proves to be $63. What is the trader's gain or loss? ..............
4. A trader buys 100 European call options with a strike price of $20 and a time to maturity of one year.
The cost of each option is $2. The price of the underlying asset proves to be $25 in one year. What is the
trader's gain or loss? ............
5. A trader sells 100 European put options with a strike price of $50 and a time to maturity of six
months. The price received for each option is $4. The price of the underlying asset is $41 in six months.
What is the trader's gain or loss? ………
6. The price of a stock is $36 and the price of a three-month call option on the stock with a strike price of
$36 is $3.60. Suppose a trader has $3,600 to invest and is trying to choose between buying 1,000
,options and 100 shares of stock. How high does the stock price have to rise for an investment in options
to be as profitable as an investment in the stock? ………..
7. 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.
(i) What is the breakeven stock price, above which the trader makes a profit? ……….
(ii) What is the breakeven stock price below which the trader makes a profit? ……….
, CHAPTER 2
Test Bank
1. Which of the following is true (circle one)
(a) Both forward and futures contracts are traded on exchanges.
(b) Forward contracts are traded on exchanges, but futures contracts are not.
(c) Futures contracts are traded on exchanges, but forward contracts are not.
(d) Neither futures contracts nor forward contracts are traded on exchanges.
2. Which of the following is not true (circle one)
(a) Futures contracts nearly always last longer than forward contracts
(b) Futures contracts are standardized; forward contracts are not.
(c) Delivery or final cash settlement usually takes place with forward contracts; the same is not true of
futures contracts.
(d) Forward contract usually have one specified delivery date; futures contract often have a range of
delivery dates.
3. In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery locations. Which of
the following is true (circle one)
(a) This flexibility tends increase the futures price.
(b) This flexibility tends decrease the futures price.
(c) This flexibility may increase and may decrease the futures price.
(d) This has no effect on the futures price
4. A company enters into a short futures contract to sell 50,000 pounds of cotton for 70 cents per
pound. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price
above which there will be a margin call? ………..
, 5. A company enters into a long futures contract to buy 1,000 units of a commodity for $20 per unit. The
initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be
withdrawn from the margin account? …………..
6. On the floor of a futures exchange one futures contract is traded where both the long and short
parties are closing out existing positions. What is the resultant change in the open interest? …………….
7. Who determines when delivery will take place in a corn futures contract (circle one)
(a) The party with the long position
(b) The party with the short position
(c) Either party can specify a delivery date
(d) The exchange specifies the exact delivery date.
8. You sell three December gold futures contracts when the futures price is $410 per ounce. Each
contract is on 100 ounces of gold and the initial margin per contract is $2,000. The maintenance margin
per contract is $1,500. During the next seven days the futures price rises slowly to $412 per ounce.
What is the balance of your margin account at the end of the seven days?
9. A hedger takes a long position in a futures contract on November 1, 2009 to hedge an exposure on
March 1, 2010. The initial futures price is $20. On December 31, 2009 the futures price is $21. On March
1, 2010 it is $24. The contract is closed out on March 1, 2010. What gain is recognized in the accounting
year January 1 to December 31, 2010? Each contract is on 1000 units of the commodity………
10. What is your answer to question 9 if the trader is a speculator rather than a hedger? …………
