Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter1:IntroductionMultipleChoiceTestBank:QuestionswithAnswers1.Aone-yearforwardcontractisanagreementwhereA.Onesidehastherighttobuyanassetforacertainpriceinoneyear’stime.B.Onesidehastheobligationtobuyanassetforacertainpriceinoneyear’stime.C.Onesidehastheobligationtobuyanassetforacertainpriceatsometimeduringthenextyear.D.Onesidehastheobligationtobuyanassetforthemarketpriceinoneyear’stime.Answer:BAone-yearforwardcontractisanobligationtobuyorsellinoneyear’stimeforapredeterminedprice.Bycontrast,anoptionistherighttobuyorsell.2.WhichofthefollowingisNOTtrueA.WhenaCBOEcalloptiononIBMisexercised,IBMissuesmorestockB.AnAmericanoptioncanbeexercisedatanytimeduringitslifeC.AncalloptionwillalwaysbeexercisedatmaturityiftheunderlyingassetpriceisgreaterthanthestrikepriceD.Aputoptionwillalwaysbeexercisedatmaturityifthestrikepriceisgreaterthantheunderlyingassetprice.Answer:AWhenanIBMcalloptionisexercisedtheoptionsellermustbuysharesinthemarkettoselltotheoptionbuyer.IBMisnotinvolvedinanyway.AnswersB,C,andDaretrue.3.Aone-yearcalloptiononastockwithastrikepriceof$30costs$3;aone-yearputoptiononthestockwithastrikepriceof$30costs$4.Supposethatatraderbuystwocalloptionsandoneputoption.ThebreakevenstockpriceabovewhichthetradermakesaprofitisA.$35B.$40C.$30D.$36Answer:AWhenthestockpriceis$35,thetwocalloptionsprovideapayoffof2×(35−30)or$10.Theputoptionprovidesnopayoff.Thetotalcostoftheoptionsis2×3+4or$10.ThestockpriceinA,$35,isthereforethebreakevenstockpriceabovewhichthepositionisprofitablebecauseitisthepriceforwhichthecostoftheoptionsequalsthepayoff.4.Aone-yearcalloptiononastockwithastrikepriceof$30costs$3;aone-yearputoptiononthestockwithastrikepriceof$30costs$4.Supposethatatraderbuystwocalloptionsandoneputoption.ThebreakevenstockpricebelowwhichthetradermakesaprofitisA.$25B.$28C.$26D.$20Answer:DWhenthestockpriceis$20thetwocalloptionsprovidenopayoff.Theputoptionprovidesapayoffof30−20or$10.Thetotalcostoftheoptionsis2×3+4or$10.Thestock...
