Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter17:OptionsonStockIndicesandCurrenciesMultipleChoiceTestBank:QuestionswithAnswers1.Whichofthefollowingdescribeswhatacompanyshoulddotocreatearangeforwardcontractinordertohedgeforeigncurrencythatwillbereceived?A.BuyaputandsellacallonthecurrencywiththestrikepriceoftheputhigherthanthatofthecallB.BuyaputandsellacallonthecurrencywiththestrikepriceoftheputlowerthanthatofthecallC.BuyacallandsellaputonthecurrencywiththestrikepriceoftheputhigherthanthatofthecallD.BuyacallandsellaputonthecurrencywiththestrikepriceoftheputlowerthanthatofthecallAnswer:BThecompanywantstoensurethatthepricereceivedfortheforeigncurrencywillbebetweenK1andK2.ItdoesthisbybuyingaputoptionwithstrikepriceK1andsellingacalloptionwithstrikepriceK2.2.Whichofthefollowingdescribeswhatacompanyshoulddotocreatearangeforwardcontractinordertohedgeforeigncurrencythatwillbepaid?A.BuyaputandsellacallonthecurrencywiththestrikepriceoftheputhigherthanthatofthecallB.BuyaputandsellacallonthecurrencywiththestrikepriceoftheputlowerthanthatofthecallC.BuyacallandsellaputonthecurrencywiththestrikepriceoftheputhigherthanthatofthecallD.BuyacallandsellaputonthecurrencywiththestrikepriceoftheputlowerthanthatofthecallAnswer:DThecompanywantstoensurethatthepricepaidfortheforeigncurrencywillbebetweenK1andK2.ItdoesthisbysellingaputoptionwithstrikepriceK1andbuyingacalloptionwithstrikepriceK2.3.Whatshouldthecontinuousdividendyieldbereplacedbywhenoptionsonanexchangeratearevaluedusingtheformulaforanoptiononastockpayingacontinuousdividendyield?A.Thedomesticrisk-freerateB.Theforeignrisk-freerateC.Theforeignrisk-freerateminusthedomesticrisk-freerateD.NoneoftheaboveAnswer:BThecontinuousdividendyield,q,shouldbereplacedbytheforeignriskrate,rf.4.Supposethatthedomesticriskfreerateisranddividendyieldonanindexisq.Howshouldtheput-callparityformulaforoptionsonanon-dividend-payingstockbechangedtoprovideaput-callparityformulaforoptionsonastockindex?AssumetheoptionslastTyears.A.Thestockpriceisre...
