Fundamentals of Futures

Test Bank f or Fundamentals of Futures and Options Markets Eighth Edition John C. Hull

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Fundamentals of Futures and Options Markets, 8e (Hull) Chapter 1 Introduction 1) A one-year forward contract is an agreement where

• One side has the right to buy an asset for a certain price in one year's time
• One side has the obligation to buy an asset for a certain price in one year's time
• One side has the obligation to buy an asset for a certain price at some time during the next

year

• One side has the obligation to buy an asset for the market price in one year's time

Answer: B

2) Which of the following is NOT true?

• When a CBOE call option on IBM is exercised, IBM issues more stock
• An American option can be exercised at any time during its life
• An call option will always be exercised at maturity if the underlying asset price is greater than

the strike price

• A put option will always be exercised at maturity if the strike price is greater than the

underlying asset price

Answer: A

3) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is

A) $35

B) $40

C) $30

D) $36

Answer: A

4) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is

A) $25

B) $28

C) $26

D) $20

Answer: D

5) Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets?

• The exchange-traded market is twice as big as the over-the-counter market
• The over-the-counter market is twice as big as the exchange-traded market
• The exchange-traded market is ten times as big as the over-the-counter market
• The over-the-counter market is ten times as big as the exchange-traded market

Answer: D 2 / 4

6) Which of the following best describes the term "spot price"?

• The price for immediate delivery
• The price for delivery at a future time
• The price of an asset that has been damaged
• The price of renting an asset

Answer: A

7) Which of the following is true about a long forward contract?

• The contract becomes more valuable as the price of the asset declines
• The contract becomes more valuable as the price of the asset rises
• The contract is worth zero if the price of the asset declines after the contract has been entered

into

• The contract is worth zero if the price of the asset rises after the contract has been entered into

Answer: B

8) An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true?

• The investor has made a gain of $4,000
• The investor has made a loss of $4,000
• The investor has made a gain of $2,000
• The investor has made a loss of $2,000

Answer: B

9) Which of the following describes European options?

• Sold in Europe
• Priced in Euros
• Exercisable only at maturity
• Calls (there are no puts)

Answer: C

10) Which of the following is NOT true?

• A call option gives the holder the right to buy an asset by a certain date for a certain price
• A put option gives the holder the right to sell an asset by a certain date for a certain price
• The holder of a call or put option must exercise the right to sell or buy an asset
• The holder of a forward contract is obligated to buy or sell an asset

Answer: C

11) Which of the following is NOT true about call and put options?

• An American option can be exercised at any time during its life
• A European option can only be exercised only on the maturity date
• Investors must pay an upfront price (the option premium) for an option contract
• The price of a call option increases as the strike price increases

Answer: D 3 / 4

12) The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65.The trader's net profit is

A) $700

B) $500

C) $300

D) $600

Answer: C

13) 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

14) 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 $1000

Answer: A

15) 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

16) 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

A) $45

B) $46

C) $55

D) $50

Answer: D

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