Options, Futures, and Other Derivatives 11th Edition by John C. Hull Test bank

K − S_T. A long position in a European call option leads to a payoff of max(S_T − K, 0). When added together, we see that the total position leads to a payoff of
max(0, K − S_T), which is the payoff from a long position in a put option. C can also be seen to be true by plotting the payoffs as a function of the final stock price.
 

19. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should:
    1. Buy 16 contracts
    2. Sell 16 contracts
    3. Buy 20 contracts
    4. Sell 20 contracts

 
Answer: B
One futures contract protects a portfolio worth 1250 × 250. The number of contracts required is therefore 5,000,000/(1250 × 250) = 16. To remove market risk, we need to gain on the contracts when the market declines. A short futures position is therefore required.
 
 
 

20. Which of the following best describes a central clearing party (CCP)?
    1. It is a trader that works for an exchange.
    2. It stands between two parties in the over-the-counter market.
    3. It is a trader that works for a bank.
    4. It helps facilitate futures trades.

             Answer: B
A central clearing party is a clearing house that stands between two parties in the over-the-counter market. It serves the same purpose as an exchange clearing house.