Options, Futures, and Other Derivatives 11th Edition by John C. Hull Test bank
- The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader’s net profit or loss is:
- Gain of $1,000
- Loss of $2,000
- Loss of $2,800
- Loss of $1,000
Answer: D
The payoff that must be made on the options is 200 × (120 − 110) or $2000. The amount received for the options is 5 × 200 or $1000. The net loss is therefore 2000 − 1000 or $1000.
- The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader’s net profit or loss is:
- Loss of $1,000
- Loss of $2,000
- Gain of $200
- Gain of $1,000
The payoff is 90 − 85 or $5 per option. For 200 options, the payoff is therefore 5 × 200 or $1000. However, the options cost 10 × 200 or $2000. There is therefore a net loss of $1000.
- The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader’s net profit or loss is:
- Loss of $800
- Loss of $200
- Gain of $200
- Loss of $900
Answer: C
The payoff is 40 − 39 or $1 per option. For 200 options, the payoff is therefore 1 × 200 or $200. However, the premium received by the trader is 2 × 200 or $400. The trader therefore has a net gain of $200.
- A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above:
- $45
- $46
- $55
- $50
When the stock price is $50, the first alternative leads to a position in the stock worth 100 × 50 or $5000. The second alternative leads to a payoff from the options of 1000 × (50 − 45) or $5000. Both alternatives cost $4000. It follows that the alternatives are equally profitable when the stock price is $50. For stock prices above $50, the option alternative is more profitable.
- A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true?
- A forward contract can be used to lock in the exchange rate.
- A forward contract will always give a better outcome than an option.
- An option will always give a better outcome than a forward contract.
- An option can be used to lock in the exchange rate.
A forward contract ensures that the effective exchange rate will equal the current forward exchange rate. An option provides insurance that the exchange rate will not be worse than a certain level, but requires an upfront premium. Options sometimes give a better outcome and sometimes give a worse outcome than forwards.
- A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to:
- A short position in a call option.
- A short position in a put option.
- A long position in a put option.
- None of the above.
Answer: C
Suppose that ST is the final asset price and K is the strike price/forward price. A short forward contract leads to a payoff of