Options, Futures, and Other Derivatives 11th Edition by John C. Hull Test bank
Answer: A
The spot price is the price for immediate delivery. The futures or forward price is the price for delivery in the future.
- Which of the following is true about a long forward contract?
- The contract becomes more valuable as the price of the asset declines.
- The contract becomes more valuable as the price of the asset rises.
- The contract is worth zero if the price of the asset declines after the contract has been entered into.
- The contract is worth zero if the price of the asset rises after the contract has been entered into.
- An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true?
- The investor has made a gain of $4,000.
- The investor has made a loss of $4,000.
- The investor has made a gain of $2,000.
- The investor has made a loss of $2,000.
Answer: B
An investor who buys (has a long position) has a gain when a futures price increases. An investor who sells (has a short position) has a loss when a futures price increases.
- Which of the following describes European options?
- Sold in Europe
- Priced in Euros
- Exercisable only at maturity
- Calls (there are no European puts)
European options can be exercised only at maturity. This is in contrast to American options which can be exercised at any time. The term “European” has nothing to do with geographical location, currencies, or whether the option is a call or a put.
- Which of the following is NOT true?
- A call option gives the holder the right to buy an asset by a certain date for a certain price.
- A put option gives the holder the right to sell an asset by a certain date for a certain price.
- The holder of a call or put option must exercise the right to sell or buy an asset.
- The holder of a forward contract is obligated to buy or sell an asset.
Answer: C
The holder of a call or put option has the right to exercise the option but is not required to do so. A, B, and C are correct.
- Which of the following is NOT true about call and put options?
- An American option can be exercised at any time during its life.
- A European option can only be exercised only on the maturity date.
- Investors must pay an upfront price (the option premium) for an option contract.
- The price of a call option increases as the strike price increases.
Answer: D
A call option is the option to buy for the strike price. As the strike price increases, this option becomes less attractive and is therefore less valuable. A, B, and C are true.
- The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader’s net profit is:
- $700
- $500
- $300
- $600
Answer: C
The payoff from the options is 100 × (65 − 60) or $500. The cost of the options is 2 × 100 or $200. The net profit is therefore 500 − 200 or $300.