Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter13:BinomialTreesMultipleChoiceTestBank:QuestionswithAnswers1.Thecurrentpriceofanon-dividend-payingstockis$30.Overthenextsixmonthsitisexpectedtoriseto$36orfallto$26.Assumetherisk-freerateiszero.Aninvestorsellscalloptionswithastrikepriceof$32.Whichofthefollowinghedgestheposition?A.Buy0.6sharesforeachcalloptionsoldB.Buy0.4sharesforeachcalloptionsoldC.Short0.6sharesforeachcalloptionsoldD.Short0.6sharesforeachcalloptionsoldAnswer:BThevalueoftheoptionwillbeeither$4orzero.Ifisthepositioninthestockwerequire36−4=26sothat=0.4.itfollowsthat0.4sharesshouldbepurchasedforeachoptionsold.2.Thecurrentpriceofanon-dividend-payingstockis$30.Overthenextsixmonthsitisexpectedtoriseto$36orfallto$26.Assumetherisk-freerateiszero.Whatistherisk-neutralprobabilityofthatthestockpricewillbe$36?A.0.6B.0.5C.0.4D.0.3Answer:CTheformulafortherisk-neutralprobabilityofanupmovementisInthiscaseu=36/30or1.2andd=26/30=0.8667.Alsor=0andT=0.5.Theformulagivesp=(1-0.8667/(1.2-0.8667)=0.4.3.Thecurrentpriceofanon-dividend-payingstockis$30.Overthenextsixmonthsitisexpectedtoriseto$36orfallto$26.Assumetherisk-freerateiszero.Aninvestorsellscalloptionswithastrikepriceof$32.Whatisthevalueofeachcalloption?A.$1.6B.$2.0C.$2.4D.$3.0Answer:ATheformulafortherisk-neutralprobabilityofanupmovementisInthiscaseu=36/30or1.2andd=26/30=0.8667.Alsor=0andT=0.5.Theformulagivesp=(1-0.8667/(1.2-0.8667)=0.4.Thepayofffromthecalloptionis$4ifthereisanupmovementand$0ifthereisadownmovement.Thevalueoftheoptionistherefore0.4×4+0.6×0=$1.6.(Wedonotdoanydiscountingbecausetheinterestrateiszero.)4.Thecurrentpriceofanon-dividend-payingstockis$40.Overthenextyearitisexpectedtoriseto$42orfallto$37.Aninvestorbuysputoptionswithastrikepriceof$41.Whichofthefollowingisnecessarytohedgetheposition?A.Buy0.2sharesforeachoptionpurchasedB.Sell0.2sharesforeachoptionpurchasedC.Buy0.8sharesforeachoptionpurchasedD.Sell0.8sharesforeachoptionpurchasedAnswer:CThepayofffromtheputoptioniszeroifthereis...
