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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 18: Futures Options Multiple Choice Test Bank: Questions with Answers 1. Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures exercises? A. A long position in a futures contract B. A short position in a futures contract C. A long position in the underlying asset D. A short position in the underlying asset Answer: B The holder of the put acquires a short futures position which can be
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 18: Futures Options Multiple Choice Test Bank: uestions !ith ns!ers 1.Which of the following is acquired (in addition to a cash payo) when the holder of a put futures exercises?A.A long position in a futures contractB.A short position in a futures contractC.A long position in the underlying asset.A short position in the underlying asset Answer! B  he holder of the put acquires a short futures position which can #e i$$ediately closed out if desired.%.Which of the following is acquired (in addition to a cash payo) when the holder of a call futures exercises?A.A long position in a futures contractB.A short position in a futures contractC.A long position in the underlying asset.A short position in the underlying asset Answer! A   he holder of the call acquires a long futures position which can #e i$$ediately closed out if desired.&. he ris'free rate is * and the di+idend yield on the ,- // index is %*. Which of the following is correct when a futures option on the index is #eing +alued? A. he futures price of the ,- // is treated li'e a stoc' paying a di+idend yield of *. B. he futures price of the ,- // is treated li'e a stoc' paying a di+idend yield of %*. C. he futures price of the ,- // is treated li'e a stoc' paying a di+idend yield of &*. . he futures price of the ,- // is treated li'e a nondi+idendpaying stoc'. Answer! AWhen a futures option is #eing +alued the di+idend yield is set equal to the do$estic ris'free rate. 0n this case the do$estic ris'free rate is *. A is therefore correct. .Which of the following is 23 true?  A.Blac'4s $odel can #e used to +alue an A$ericanstyle option on futuresB.Blac'4s $odel can #e used to +alue a 5uropeanstyle option on futuresC.Blac'4s $odel can #e used to +alue a 5uropeanstyle option on spot.Blac'4s $odel is widely used #y practitioners Answer! A Blac'4s $odel is used for +aluing 5uropean options. A is therefore clearly false..Which of the following is true when the futures price exceeds the spot price?A.Calls on futures should ne+er #e exercised earlyB.ut on futures should ne+er #e exercised earlyC.A call on futures is always worth at least as $uch as the correspondingcall on spot.A call on spot is always worth at least as $uch as the corresponding call on futuresAnswer! C0f the futures price is a#o+e the spot price a call on futures $ust #e worth $ore than a call on spot. Both calls and puts on futures are so$eti$es exercised early.6.Which of the following descri#es a futuresstyle option?A.An option on a futuresB.An option on spot with daily settle$ent C.A futures on an option payo .2one of the a#o+eAnswer! CA futures style option is a futures contract on the option payo 7.A futures price is currently / cents. 0t is expected to $o+e up to  cents or down to & cents in the next six $onths. he ris'free interest rate is 6*. What is the pro#a#ility of an up $o+e$ent in a ris'neutral world?A./.B./.C./.7%./.6 Answer!   he pro#a#ility of an up $o+e$ent is (1 d  )8( u-d  ). 0n this case u  is 1.1 and d   is /.9. he pro#a#ility of an up $o+e$ent is therefore /.18/.%:/.6.9.A futures price is currently / cents. 0t is expected to $o+e up to  cents or down to & cents in the next six $onths. he ris'free interest rate is 6*.  What is the +alue of a six$onth put option with a stri'e price of &7 cents?A.&.// centsB.%.;1 centsC.1.16 cents.1.%/ cents Answer! C  he pro#a#ility of an up $o+e$ent is (1 d  )8( u-d  ). 0n this case u  is 1.1 and d   is /.9. he pro#a#ility of an up $o+e$ent is therefore /.18/.%:/.6. he option pays o <ero if there is an up $o+e$ent and & cents if there is a down$o+e$ent. he +alue of the option is therefore /.=&=e /./6=/. : 1.16 cents.;.A futures price is currently / cents. 0t is expected to $o+e up to  cents or down to & cents in the next six $onths. he ris'free interest rate is 6*. What is the +alue of a six $onth call option with a stri'e price of &; cents?A..// centsB.%.;1 centsC.&.// cents..%1 cents Answer! B   he pro#a#ility of an up $o+e$ent is (1 d  )8( u-d  ). 0n this case u  is 1.1 and d   is /.9. he pro#a#ility of an up $o+e$ent is therefore /.18/.%:/.6. he option pays o  cents if there is an up $o+e$ent and <ero if there is a down$o+e$ent. he +alue of the option is therefore /.6==e /./6=/. : %.;1 cents.1/.Which of the following are true?A.>utures options are usually 5uropeanB.>utures options are usually A$ericanC.Both A$erican and 5uropean futures options trade acti+ely are exchanges.Both A$erican and 5uropean futures options trade acti+ely in the 3 C $ar'et Answer! B>utures options trade on exchanges and are A$erican.11.Which of the following is true for a ,epte$#er futures option?A. he expiration $onth of option is ,epte$#erB. he option was rst traded in ,epte$#erC. he deli+ery $onth of the underlying futures contract is ,epte$#er.,epte$#er is the rst $onth when the option can #e exercised Answer! C    he $onth of a futures option refers to the $onth of the underlying futures contract.1%.What is the cash settle$ent if a put futures option on / units of the underlying asset is exercised?A.(Current >utures rice @ ,tri'e rice) ti$es /B.(,tri'e rice @ Current >utures rice) ti$es /C.(ost ecent >utures ,ettle$ent rice @ ,tri'e rice) ti$es /.(,tri'e rice @ ost ecent >utures ,ettle$ent rice) ti$es /Answer!   he cash payo is the stri'e price $inus the $ost recent futures settle$ent price ti$es the si<e of the contract. he party exercising also gets a short futures position which #rings the +alue of what is recei+ed at the ti$e of exercise equal to stri'e price $inus the current futures price ti$es the si<e of the contract.1&.What is the cash co$ponent of the payo if a call futures option on / units of the underlying asset is exercised?A.(Current >utures rice @ ,tri'e rice) ti$es /B.(,tri'e rice @ Current >utures rice) ti$es /C.(ost ecent >utures ,ettle$ent rice @ ,tri'e rice) ti$es /.(,tri'e rice @ ost ecent >utures ,ettle$ent rice) ti$es /Answer! CWhen the option is exercised the holder o#tains the cash payo in C and a long futures contract.1.Which of the following is true? A.A futures option is settled dailyB.A futuresstyle option is settled dailyC.Both a futures option and a futuresstyle option are settled daily.2either a futures option nor a futuresstyle option is settled dailyAnswer! BA futures style li'e a futures contract is settled daily. egular options are not settled daily. 1.Which of the following is true a#out a futures option and a spot option on thesa$e underlying asset when they ha+e the sa$e stri'e price? he expirationdates of the two options and the futures are all the sa$e.A.A 5uropean call spot option and an A$erican call futures option areequi+alent B.An A$erican call spot option and a 5uropean call futures option areequi+alent C.A 5uropean put spot option and 5uropean put futures option areequi+alent
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