Options, Futures, and Other Derivatives 11th Edition by John C. Hull Test bank
Hull: Options, Futures, and Other Derivatives, Eleventh Edition
Chapter 1: Introduction
Multiple Choice test bank: Questions with Answers
Answer: B
A one-year forward contract is an obligation to buy or sell in one year’s time for a predetermined price. By contrast, an option is the right to buy or sell.
Answer: A
When an IBM call option is exercised, the option seller must buy shares in the market to sell to the option buyer. IBM is not involved in any way. Answers B, C, and D are true.
Answer: A
When the stock price is $35, the two call options provide a payoff of 2 × (35 − 30) or $10. The put option provides no payoff. The total cost of the options is 2 × 3 + 4 or $10.The stock price in A, $35, is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.
Answer: D
When the stock price is $20, the two call options provide no payoff. The put option provides a payoff of 30 − 20 or $10. The total cost of the options is 2 × 3 + 4 or $10.The stock price in D, $20, is therefore the breakeven stock price below which the position is profitable because it is the price for which the cost of the options equals the payoff.
Answer: D
The over-the-counter market is about $600 trillion whereas the exchange-traded market is about $60 trillion.
Chapter 1: Introduction
Multiple Choice test bank: Questions with Answers
- A one-year forward contract is an agreement where:
- One side has the right to buy an asset for a certain price in one year’s time.
- One side has the obligation to buy an asset for a certain price in one year’s time.
- One side has the obligation to buy an asset for a certain price at some time during the next year.
- One side has the obligation to buy an asset for the market price in one year’s time.
Answer: B
A one-year forward contract is an obligation to buy or sell in one year’s time for a predetermined price. By contrast, an option is the right to buy or sell.
- Which of the following is NOT true?
- When a CBOE call option on IBM is exercised, IBM issues more stock.
- An American option can be exercised at any time during its life.
- A call option will always be exercised at maturity if the underlying asset price is greater than the strike price.
- A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.
Answer: A
When an IBM call option is exercised, the option seller must buy shares in the market to sell to the option buyer. IBM is not involved in any way. Answers B, C, and D are true.
- 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. The breakeven stock price above which the trader makes a profit is:
- $35
- $40
- $30
- $36
Answer: A
When the stock price is $35, the two call options provide a payoff of 2 × (35 − 30) or $10. The put option provides no payoff. The total cost of the options is 2 × 3 + 4 or $10.The stock price in A, $35, is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.
- 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. The breakeven stock price below which the trader makes a profit is:
- $25
- $28
- $26
- $20
Answer: D
When the stock price is $20, the two call options provide no payoff. The put option provides a payoff of 30 − 20 or $10. The total cost of the options is 2 × 3 + 4 or $10.The stock price in D, $20, is therefore the breakeven stock price below which the position is profitable because it is the price for which the cost of the options equals the payoff.
- Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets?
- The exchange-traded market is twice as big as the over-the-counter market.
- The over-the-counter market is twice as big as the exchange-traded market.
- The exchange-traded market is about ten times as big as the over-the-counter market.
- The over-the-counter market is about ten times as big as the exchange-traded market.
Answer: D
The over-the-counter market is about $600 trillion whereas the exchange-traded market is about $60 trillion.
- Which of the following best describes the term “spot price”?
- The price for immediate delivery.
- The price for delivery at a future time.
- The price of an asset that has been damaged.