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Chapter 1: Introduction
1. A one-year forward contract is an agreement where

A. One side has the right to buy an asset for a certain price in one year’s time.
B. One side has the obligation to buy an asset for a certain price in one year’s time.
C. One side has the obligation to buy an asset for a certain price at some time during the
next year.
D. One side has the obligation to buy an asset for the market price in one year’s time.
2. Which of the following is NOT true

A. When a CBOE call option on IBM is exercised, IBM issues more stock
B. An American option can be exercised at any time during its life
C. An call option will always be exercised at maturity if the underlying asset price is
greater than the strike price
D. A put option will always be exercised at maturity if the strike price is greater than
the underlying asset price.
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
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
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
A. The exchange-traded market is twice as big as the over-the-counter market.
B. The over-the-counter market is twice as big as the exchange-traded market.
C. The exchange-traded market is ten times as big as the over-the-counter market.
D. The over-the-counter market is ten times as big as the exchange-traded market.
6. Which of the following best describes the term “spot price”
A. The price for immediate delivery
B. The price for delivery at a future time
C. The price of an asset that has been damaged
D. The price of renting an asset
7. Which of the following is true about a long forward contract
A. The contract becomes more valuable as the price of the asset declines
B. The contract becomes more valuable as the price of the asset rises
C. The contract is worth zero if the price of the asset declines after the contract has been
entered into
D. The contract is worth zero if the price of the asset rises after the contract has been
entered into
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
A. The investor has made a gain of $4,000
B. The investor has made a loss of $4,000
C. The investor has made a gain of $2,000
D. The investor has made a loss of $2,000
9. Which of the following describes European options?

A. Sold in Europe
B. Priced in Euros
C. Exercisable only at maturity
D. Calls (there are no European puts)

A. A call option gives the holder the right to buy an asset by a certain date for a certain
price
B. A put option gives the holder the right to sell an asset by a certain date for a certain
price
C. The holder of a call or put option must exercise the right to sell or buy an asset
D. The holder of a forward contract is obligated to buy or sell an asset
11. Which of the following is NOT true about call and put options:
A. An American option can be exercised at any time during its life
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
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
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
A. Gain of $1,000
B. Loss of $2,000
C. Loss of $2,800
D. Loss of $1,000
14. The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a
A. Loss of $1,000
B. Loss of $2,000
C. Gain of $200
D. Gain of $1000
15. The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a
A. Loss of $800
B. Loss of $200
C. Gain of $200
D. Loss of $900
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
17. A company knows it will have to pay a certain amount of a foreign currency to one of its
suppliers in the future. Which of the following is true
A. A forward contract can be used to lock in the exchange rate
B. A forward contract will always give a better outcome than an option
C. An option will always give a better outcome than a forward contract
D. An option can be used to lock in the exchange rate
.
18. A short forward contract on an asset plus a long position in a European call option on the
asset with a strike price equal to the forward price is equivalent to
A. A short position in a call option
B. A short position in a put option
C. A long position in a put option
D. None of the above
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
A. Buy 16 contracts
B. Sell 16 contracts
C. Buy 20 contracts
D. Sell 20 contracts
20. Which of the following best describes a central clearing party

A. It is a trader that works for an exchange
B. It stands between two parties in the over-the-counter market
C. It is a trader that works for a bank
D. It helps facilitate futures trades
Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 2: Mechanics of Futures Markets
Multiple Choice Test Bank: Question with Answers
1. Which of the following is true

A. Both forward and futures contracts are traded on exchanges.
B. Forward contracts are traded on exchanges, but futures contracts are not.
C. Futures contracts are traded on exchanges, but forward contracts are not.
D. Neither futures contracts nor forward contracts are traded on exchanges.
Futures contracts trade only on exchanges. Forward contracts trade only in the over-the-counter
market.

A. Futures contracts nearly always last longer than forward contracts
B. Futures contracts are standardized; forward contracts are not.
C. Delivery or final cash settlement usually takes place with forward contracts; the same is
not true of futures contracts.
D. Forward contracts usually have one specified delivery date; futures contract often have
a range of delivery dates.
Forward contracts often last longer than futures contracts. B, C, and D are true
3. In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery
locations. Which of the following is true
A. This flexibility tends increase the futures price.
B. This flexibility tends decrease the futures price.
C. This flexibility may increase and may decrease the futures price.
D. This flexibility has no effect on the futures price
The party with the short position chooses between the alternatives. The alternatives therefore
make the futures contract more attractive to the party with the short position. The lower the
futures price the less attractive it is to the party with the short position. The benefit of the
alternatives available to the party with the short position is therefore compensated for by the
futures price being lower than it would otherwise be.
4. A company enters into a short futures contract to sell 50,000 units of a commodity for 70
cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is
the futures price per unit above which there will be a margin call?
A. 78 cents
B. 76 cents
C. 74 cents
D. 72 cents
Answer: D
There will be a margin call when more than $1000 has been lost from the margin account so
that the balance in the account is below the maintenance margin level. Because the company is
short, each one cent rise in the price leads to a loss or 0.01×50,000 or $500. A greater than 2
cent rise in the futures price will therefore lead to a margin call. The future price is currently 70
cents. When the price rises above 72 cents there will be a margin call.
5. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price
will allow $2,000 to be withdrawn from the margin account?
A. $58
B. $62
C. $64
D. $66
Answer: B
Amounts in the margin account in excess of the initial margin can be withdrawn. Each $1
increase in the futures price leads to a gain of $1000. When the futures price increases by $2 the
gain will be $2000 and this can be withdrawn. The futures price is currently $60. The answer is
therefore $62.
6. One futures contract is traded where both the long and short parties are closing out existing
positions. What is the resultant change in the open interest?
A. No change
B. Decrease by one
C. Decrease by two
D. Increase by one
The open interest goes down by one. There is one less long position and one less short position.
7. Who initiates delivery in a corn futures contract

A. The party with the long position
B. The party with the short position
C. Either party
D. The exchange
The party with the short position initiates delivery by sending a “Notice of Intention to Deliver”
to the exchange. The exchange has a procedure for choosing a party with a long position to take
delivery.
8. You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units and the initial margin per contract that you provide is $2,000. The
maintenance margin per contract is $1,500. During the next day the futures price rises to
$1,012 per unit. What is the balance of your margin account at the end of the day?
A. $1,800
B. $3,300
C. $2,200
D. $3,700
Answer: B
The price has increased by $2. Because you have a short position you lose 2×100 or $200. The
balance in the margin account therefore goes down from $3,500 to $3,300.
9. A hedger takes a long position in a futures contract on a commodity on November 1, 2012

to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31,
2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on
March 1, 2013. What gain is recognized in the accounting year January 1 to December 31,
2013? Each contract is on 1000 units of the commodity.
A. $0
B. $1,000
C. $3,000
D. $4,000
Answer: D
Hedge accounting is used. The whole of the gain or loss on the futures is therefore recognized in
2013. None is recognized in 2012. In this case the gain is $4 per unit or $4,000 in total.
10. A speculator takes a long position in a futures contract on a commodity on November 1,

2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December
31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on
March 1, 2013. What gain is recognized in the accounting year January 1 to December 31,
2013? Each contract is on 1000 units of the commodity.
A. $0
B. $1,000
C. $3,000
D. $4,000
Answer: C
In this case there is no hedge accounting. Gains or losses are accounted for as they are accrued. The
price per unit increases by $3 in 2013. The total gain in 2013 is therefore $3,000.
11. The frequency with which futures margin accounts are adjusted for gains and losses is
A. Daily
B. Weekly
C. Monthly
D. Quarterly
In futures contracts margin accounts are adjusted for gains or losses daily.
12. Margin accounts have the effect of

A. Reducing the risk of one party regretting the deal and backing out
B. Ensuring funds are available to pay traders when they make a profit
C. Reducing systemic risk due to collapse of futures markets
D. All of the above
Initial margin requirements dramatically reduce the risk that a party will walk away from a
futures contract. As a result they reduce the risk that the exchange clearing house will not have
enough funds to pays profits to traders. Furthermore, if traders are less likely to suffer losses
because of counterparty defaults there is less systemic risk.
13. Which entity in the United States takes primary responsibility for regulating futures market?
A. Federal Reserve Board
B. Commodities Futures Trading Commission (CFTC)
C. Security and Exchange Commission (SEC)
D. US Treasury
The CFTC has primary responsibility for regulating futures markets
14. For a futures contract trading in April 2012, the open interest for a June 2012 contract,
when compared to the open interest for Sept 2012 contracts, is usually
A. Higher
B. Lower
C. The same
D. Equally likely to be higher or lower
The contracts which are close to maturity tend to have the highest open interest. However,
during the maturity month itself the open interest declines.
15. Clearing houses are

A. Never used in futures markets and sometimes used in OTC markets
B. Used in OTC markets, but not in futures markets
C. Always used in futures markets and sometimes used in OTC markets
D. Always used in both futures markets and OTC markets
Clearing houses are always used by exchanges trading futures. Increasingly, OTC products are
cleared through CCPs, which are a type of clearing house.
16. A haircut of 20% means that

A. A bond with a market value of $100 is considered to be worth $80 when used to
satisfy a collateral request
B. A bond with a face value of $100 is considered to be worth $80 when used to satisfy
a collateral request
C. A bond with a market value of $100 is considered to be worth $83.3 when used to
D. A bond with a face value of $100 is considered to be worth $83.3 when used to
A haircut is the amount the market price of asset is reduced by for the purposes of determining
its value for collateral purposes. A is therefore correct.
17. With bilateral clearing, the number of agreements between four dealers, who trade with
each other, is
A. 12
B. 1
C. 6
D. 2
Answer: C
Suppose the dealers are W, X, Y , and Z. The agreements are between W and X, W and Y, W and
Z, X and Y, X and Z, and Y and Z. There are therefore a total of 6 agreements.
18. Which of the following best describes central clearing parties

A. Help market participants to value derivative transactions
B. Must be used for all OTC derivative transactions
C. Are used for futures transactions
D. Perform a similar function to exchange clearing houses
CCPs do for the OTC market what exchange clearing houses do for the exchange-traded market.
The correct answer is therefore D. CCPs must be used for most standard OTC derivatives
transactions, but not for all derivatives transactions.
19. Which of the following are cash settled

A. All futures contracts
B. All option contracts
C. Futures on commodities
D. Futures on stock indices
Futures on stock indices are usually cash settled. The rest are settled by delivery of the
underlying assets
20. A limit order

A. Is an order to trade up to a certain number of futures contracts at a certain price
B. Is an order that can be executed at a specified price or one more favorable to the
investor
C. Is an order that must be executed within a specified period of time
In a limit order a trader specifies the worst price (from the trader’s perspective) at which the
trade can be carried out.
Hull: Options, Futures and Other Derivatives, Ninth Edition
Chapter 3: Hedging Strategies Using Futures
Multiple Choice Test Bank: Questions
1. The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short
futures position. The basis increases unexpectedly. Which of the following is true?
A. The hedger’s position improves.
B. The hedger’s position worsens.
C. The hedger’s position sometimes worsens and sometimes improves.
D. The hedger’s position stays the same.
2. Futures contracts trade with every month as a delivery month. A company is hedging the
purchase of the underlying asset on June 15. Which futures contract should it use?
A. The June contract
B. The July contract
C. The May contract
D. The August contract
3. On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July 1 the
spot price is $64 and the August futures price is $63.50. A company entered into futures
contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position
on July 1. What is the effective price (after taking account of hedging) paid by the company?
A. $59.50
B. $60.50
C. $61.50
D. $63.50
4. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On
November 1 the price is $980 and the December futures price is $981. A producer of the
commodity entered into a December futures contracts on March 1 to hedge the sale of the
commodity on November 1. It closed out its position on November 1. What is the effective price
(after taking account of hedging) received by the company for the commodity?
A. $1,016
B. $1,001
C. $981
D. $1,014
5. Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The
standard deviation of monthly changes in a futures price for a contract on commodity B (which
is similar to commodity A) is $3. The correlation between the futures price and the commodity
price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price
of commodity A?
A. 0.60
B. 0.67
C. 1.45
D. 0.90
6. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an
index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to reduce beta to 0.9?
A. Long 192 contracts
B. Short 192 contracts
C. Long 48 contracts
D. Short 48 contracts
7. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an
index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to increase beta to 1.8?
A. Long 192 contracts
B. Short 192 contracts
C. Long 96 contracts
D. Short 96 contracts
8. Which of the following is true?

A. The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is
regressed against the futures price (on the x-axis).
B. The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-
axis) is regressed against the spot price (on the x-axis).
C. The optimal hedge ratio is the slope of the best fit line when the change in the spot price
(on the y-axis) is regressed against the change in the futures price (on the x-axis).
D. The optimal hedge ratio is the slope of the best fit line when the change in the futures price
(on the y-axis) is regressed against the change in the spot price (on the x-axis).
9. Which of the following describes tailing the hedge?

A. A strategy where the hedge position is increased at the end of the life of the hedge
B. A strategy where the hedge position is increased at the end of the life of the futures
contract
C. A more exact calculation of the hedge ratio when forward contracts are used for hedging
10. A company due to pay a certain amount of a foreign currency in the future decides to hedge
with futures contracts. Which of the following best describes the advantage of hedging?
A. It leads to a better exchange rate being paid
B. It leads to a more predictable exchange rate being paid
C. It caps the exchange rate that will be paid
D. It provides a floor for the exchange rate that will be paid
11. Which of the following best describes the capital asset pricing model?
A. Determines the amount of capital that is needed in particular situations
B. Is used to determine the price of futures contracts
C. Relates the return on an asset to the return on a stock index
D. Is used to determine the volatility of a stock index
12. Which of the following best describes “stack and roll”?

A. Creates long-term hedges from short term futures contracts
B. Can avoid losses on futures contracts by entering into further futures contracts
C. Involves buying a futures contract with one maturity and selling a futures contract with a
different maturity
D. Involves two different exposures simultaneously
13. Which of the following increases basis risk?

A. A large difference between the futures prices when the hedge is put in place and when it is
closed out
B. Dissimilarity between the underlying asset of the futures contract and the hedger’s
exposure
C. A reduction in the time between the date when the futures contract is closed and its
delivery month
14. Which of the following is a reason for hedging a portfolio with an index futures?
A. The investor believes the stocks in the portfolio will perform better than the market but is
uncertain about the future performance of the market
B. The investor believes the stocks in the portfolio will perform better than the market and
the market is expected to do well
C. The portfolio is not well diversified and so its return is uncertain
D. All of the above
15. Which of the following does NOT describe beta?

A. A measure of the sensitivity of the return on an asset to the return on an index
B. The slope of the best fit line when the return on an asset is regressed against the return on
the market
C. The hedge ratio necessary to remove market risk from a portfolio
D. Measures correlation between futures prices and spot prices for a commodity

A. Hedging can always be done more easily by a company’s shareholders than by the
company itself
B. If all companies in an industry hedge, a company in the industry can sometimes reduce its
risk by choosing not to hedge
C. If all companies in an industry do not hedge, a company in the industry can reduce its risk
by hedging
D. If all companies in an industry do not hedge, a company is liable increase its risk by hedging
17. Which of the following is necessary for tailing a hedge?

A. Comparing the size in units of the position being hedged with the size in units of the
futures contract
B. Comparing the value of the position being hedged with the value of one futures contract
C. Comparing the futures price of the asset being hedged to its forward price

A. Gold producers should always hedge the price they will receive for their production of gold
over the next three years
B. Gold producers should always hedge the price they will receive for their production of gold
over the next one year
C. The hedging strategies of a gold producer should depend on whether it shareholders want
exposure to the price of gold
D. Gold producers can hedge by buying gold in the forward market
19. A silver mining company has used futures markets to hedge the price it will receive for
everything it will produce over the next 5 years. Which of the following is true?
A. It is liable to experience liquidity problems if the price of silver falls dramatically
B. It is liable to experience liquidity problems if the price of silver rises dramatically
C. It is liable to experience liquidity problems if the price of silver rises dramatically or falls
dramatically
D. The operation of futures markets protects it from liquidity problems
20. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its
exposure using futures contracts. The spot price and the futures price are currently $100 and
$90, respectively. If the spot price and the futures price in one year turn out to be $112 and
$110, respectively. What is the average price paid for the commodity?
A. $92
B. $96
C. $102
D. $106
Chapter 4: Determination of Forward and Futures Prices
21. Which of the following is a consumption asset?

A. The S&P 500 index
B. The Canadian dollar
C. Copper
D. IBM stock
22. An investor shorts 100 shares when the share price is $50 and closes out the
position six months later when the share price is $43. The shares pay a dividend of
$3 per share during the six months. How much does the investor gain?
A. $1,000
B. $400
C. $700
D. $300
23. The spot price of an investment asset that provides no income is $30 and the risk-
free rate for all maturities (with continuous compounding) is 10%. What is the
three-year forward price?
A. $40.50
B. $22.22
C. $33.00
D.$33.16
24. The spot price of an investment asset is $30 and the risk-free rate for all maturities
is 10% with continuous compounding. The asset provides an income of $2 at the
end of the first year and at the end of the second year. What is the three-year
forward price?
A. $19.67
B. $35.84
C. $45.15
D. $40.50
25. An exchange rate is 0.7000 and the six-month domestic and foreign risk-free
interest rates are 5% and 7% (both expressed with continuous compounding).
What is the six-month forward rate?
A.0.7070
B. 0.7177
C. 0.7249
D.0.6930

A. The convenience yield is always positive or zero.
B. The convenience yield is always positive for an investment asset.
C. The convenience yield is always negative for a consumption asset.
D. The convenience yield measures the average return earned by holding futures
contracts.
27. A short forward contract that was negotiated some time ago will expire in three
months and has a delivery price of $40. The current forward price for three-month
forward contract is $42. The three month risk-free interest rate (with continuous
compounding) is 8%. What is the value of the short forward contract?
A. +$2.00
B. −$2.00
C. +$1.96
D. −$1.96
28. The spot price of an asset is positively correlated with the market. Which of the
following would you expect to be true?
A. The forward price equals the expected future spot price.
B. The forward price is greater than the expected future spot price.
C. The forward price is less than the expected future spot price.
D. The forward price is sometimes greater and sometimes less than the expected
future spot price.
29. Which of the following describes the way the futures price of a foreign currency is
quoted by the CME group?
A. The number of U.S. dollars per unit of the foreign currency
B. The number of the foreign currency per U.S. dollar
C. Some futures prices are always quoted as the number of U.S. dollars per
unit of the foreign currency and some are always quoted the other way
round
D. There are no quotation conventions for futures prices
30. Which of the following describes the way the forward price of a foreign currency
is quoted?
A. The number of U.S. dollars per unit of the foreign currency
B. The number of the foreign currency per U.S. dollar
C. Some forward prices are quoted as the number of U.S. dollars per unit of
the foreign currency and some are quoted the other way round
D. There are no quotation conventions for forward prices
31. Which of the following is NOT a reason why a short position in a stock is closed
out?
A. The investor with the short position chooses to close out the position
B. The lender of the shares issues instructions to close out the position
C. The broker is no longer able to borrow shares from other clients
D. The investor does not maintain margins required on his/her margin account
32. Which of the following is NOT true?

A. Gold and silver are investment assets
B. Investment assets are held by significant numbers of investors for
investment purposes
C. Investment assets are never held for consumption
D. The forward price of an investment asset can be obtained from the spot
price, interest rates, and the income paid on the asset
33. What should a trader do when the one-year forward price of an asset is too low?
Assume that the asset provides no income.
A. The trader should borrow the price of the asset, buy one unit of the asset
and enter into a short forward contract to sell the asset in one year.
B. The trader should borrow the price of the asset, buy one unit of the asset
and enter into a long forward contract to buy the asset in one year.
C. The trader should short the asset, invest the proceeds of the short sale at the
risk-free rate, enter into a short forward contract to sell the asset in one year
D. The trader should short the asset, invest the proceeds of the short sale at the
risk-free rate, enter into a long forward contract to buy the asset in one year
34. Which of the following is NOT true about forward and futures contracts?
A. Forward contracts are more liquid than futures contracts
B. The futures contracts are traded on exchanges while forward contracts are
traded in the over-the-counter market
C. In theory forward prices and futures prices are equal when there is no
uncertainty about future interest rates
D. Taxes and transaction costs can lead to forward and futures prices being
different
35. As the convenience yield increases, which of the following is true?

A. The one-year futures price as a percentage of the spot price increases
B. The one-year futures price as a percentage of the spot price decreases
C. The one-year futures price as a percentage of the spot price stays the same
D. Any of the above can happen
36. As inventories of a commodity decline, which of the following is true?

A. The one-year futures price as a percentage of the spot price increases
B. The one-year futures price as a percentage of the spot price decreases
C. The one-year futures price as a percentage of the spot price stays the same
D. Any of the above can happen
37. Which of the following describes a known dividend yield on a stock?

A. The size of the dividend payments each year is known
B. Dividends per year as a percentage of today’s stock price are known
C. Dividends per year as a percentage of the stock price at the time when
dividends are paid are known
D. Dividends will yield a certain return to a person buying the stock today
38. Which of the following is an argument used by Keynes and Hicks?

A. If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be higher than the expected future spot price
B. If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be lower than the expected future spot price
C. If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be lower than today’s spot price
D. If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be higher than today’s spot price
39. Which of the following describes contango?

A. The futures price is below the expected future spot price
B. The futures price is below today’s spot price
C. The futures price is a declining function of the time to maturity
D. The futures price is above the expected future spot price
40. Which of the following is true for a consumption commodity?

A. There is no limit to how high or low the futures price can be, except that the
futures price cannot be negative
B. There is a lower limit to the futures price but no upper limit
C. There is an upper limit to the futures price but no lower limit, except that
the futures price cannot be negative
D. The futures price can be determined with reasonable accuracy from the spot
price and interest rates
Hull: Options, Futures and Other Derivatives, Ninth Edition
Chapter 6: Interest Rate Futures
Multiple Choice Test Bank: Questions
41. Which of following is applicable to corporate bonds in the United States?

A. Actual/360
B. Actual/Actual
C. 30/360
D. Actual/365
42. It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12%
per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100
and pays coupons on April 1 and October 1. What is the cash price?
A. 106.00
B. 106.02
C. 105.98
D. 106.04
43. It is May 1. The quoted price of a bond with a 30/360 day count and 12% per annum
coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1
and October 1. What is the cash price?
A. 106.00
B. 106.02
C 105.98
D. 106.04
44. The most recent settlement bond futures price is 103.5. Which of the following four bonds is
cheapest to deliver?
A. Quoted bond price = 110; conversion factor = 1.0400.
B. Quoted bond price = 160; conversion factor = 1.5200.
C. Quoted bond price = 131; conversion factor = 1.2500.
D. Quoted bond price = 143; conversion factor = 1.3500.
45. Which of the following is NOT an option open to the party with a short position in the Treasury
bond futures contract?
A. The ability to deliver any of a number of different bonds
B. The wild card play
C. The fact that delivery can be made any time during the delivery month
D. The interest rate used in the calculation of the conversion factor
46. A trader enters into a long position in one Eurodollar futures contract. How much does the
trader gain when the futures price quote increases by 6 basis points?
A. $6
B. $150
C. $60
D. $600
47. The bonds that can be delivered in a Treasury bond futures contract are
A. Assets that provide no income
B. Assets that provide a known cash income
C. Assets that provide a known yield
48. An ultra T-bond futures contract is one where

A. Bonds with maturities less than 3 years can be delivered
B. Bonds with maturities less than 10 years can be delivered
C. Bonds with maturities greater than 15 years can be delivered
D. Bonds with maturities greater than 25 year can be delivered
49. A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110
and each contract is for the delivery of bonds with a face value of $100,000. On the delivery
date the duration of the bond that is expected to be cheapest to deliver is 6 years and the
duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the
portfolio?
A. 100
B. 200
C. 300
D. 400

A. The futures rates calculated from a Eurodollar futures quote are always less than the
corresponding forward rate
B. The futures rates calculated from a Eurodollar futures quote are always greater than the
C. The futures rates calculated from a Eurodollar futures quote should equal the
D. The futures rates calculated from a Eurodollar futures quote are sometimes greater than
and sometimes less than the corresponding forward rate
51. How much is a basis point?

A. 1.0%
B. 0.1%
C. 0.01%
D. 0.001%
52. Which of the following day count conventions applies to a US Treasury bond?
A. Actual/360
B. Actual/Actual (in period)
C. 30/360
D. Actual/365
53. What is the quoted discount rate on a money market instrument?

A. The interest rate earned as a percentage of the final face value of a bond
B. The interest rate earned as a percentage of the initial price of a bond
C. The interest rate earned as a percentage of the average price of a bond
D. The risk-free rate used to calculate the present value of future cash flows from a bond
54. Which of the following is closest to the duration of a 2-year bond that pays a coupon of 8% per
annum semiannually? The yield on the bond is 10% per annum with continuous compounding.
A. 1.82
B. 1.85
C. 1.88
D. 1.92
55. Which of the following is NOT true about duration?

A. It equals the years-to-maturity for a zero coupon bond
B. It equals the weighted average of payment times for a bond, where weights are
proportional to the present value of payments
C. Equals the weighted average of individual bond durations for a portfolio, where weights
are proportional to the present value of bond prices
D. The prices of two bonds with the same duration change by the same percentage
amount when interest rate moves up by 100 basis points
56. The conversion factor for a bond is approximately

A. The price it would have if all cash flows were discounted at 6% per annum
B. The price it would have if it paid coupons at 6% per annum
C. The price it would have if all cash flows were discounted at 8% per annum
D. The price it would have if it paid coupons at 8% per annum
57. The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of the
rate underlying the futures contract is 4.25 years. The standard deviation of the change in the
short term interest rate,  = 0.011. What does the model in the text give as the difference
between the futures and the forward interest rate.
A. 0.105%
B. 0.103%
C. 0.098%
D. 0.093%
58. A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How
many contracts are required?
A. 5
B. 10
C. 15
D. 20
59. In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts?
A: 2 years
B: 5 years
C: 10 years
D: 20 years
60. Duration matching immunizes a portfolio against

A. Any parallel shift in the yield curve
B. All shifts in the yield curve
C. Changes in the steepness of the yield curve
D. Small parallel shifts in the yield curve
Chapter 6: Swaps
61. A company can invest funds for five years at LIBOR minus 30 basis points. The
five-year swap rate is 3%. What fixed rate of interest can the company earn by
using the swap?
E. 2.4%
F. 2.7%
G. 3.0%
H. 3.3%

A. Principals are not usually exchanged in a currency swap
B. The principal amounts usually flow in the opposite direction to interest
payments at the beginning of a currency swap and in the same direction as
interest payments at the end of the swap.
C. The principal amounts usually flow in the same direction as interest
payments at the beginning of a currency swap and in the opposite direction
to interest payments at the end of the swap.
D. Principals are not usually specified in a currency swap
63. Company X and Company Y have been offered the following rates
Fixed Rate Floating Rate

Company X 3.5% 3-month LIBOR plus
10bp
Company Y 4.5% 3-month LIBOR plus 30
bp
Suppose that Company X borrows fixed and company Y borrows floating. If they
enter into a swap with each other where the apparent benefits are shared equally,
what is company X’s effective borrowing rate?
A. 3-month LIBOR−30bp
B. 3.1%
C. 3-month LIBOR−10bp
D. 3.3%
64. Which of the following describes the five-year swap rate?

A. The fixed rate of interest which a swap market maker is prepared to pay in
exchange for LIBOR on a 5-year swap
B. The fixed rate of interest which a swap market maker is prepared to receive
in exchange for LIBOR on a 5-year swap
C. The average of A and B
D. The higher of A and B
65. Which of the following is a use of a currency swap?

A. To exchange an investment in one currency for an investment in another
currency
B. To exchange borrowing in one currency for borrowings in another currency
C. To take advantage situations where the tax rates in two countries are
different
D. All of the above
66. The reference entity in a credit default swap is

A. The buyer of protection
B. The seller of protection
C. The company or country whose default is being insured against
67. Which of the following describes an interest rate swap?

A. The exchange of a fixed rate bond for a floating rate bond
B. A portfolio of forward rate agreements
C. An agreement to exchange interest at a fixed rate for interest at a floating
rate
D. All of the above
68. Which of the following is true for an interest rate swap?

A. A swap is usually worth close to zero when it is first negotiated
B. Each forward rate agreement underlying a swap is worth close to zero when
the swap is first entered into
C. Comparative advantage is a valid reason for entering into the swap
69. Which of the following is true for the party paying fixed in a newly negotiated
interest rate swap when the yield curve is upward sloping?
A. The early forward contracts underlying the swap have a positive value and
the later ones have a negative value
B. The early forward contracts underlying the swap have a negative value and
the later ones have a positive value
C. The swap is designed so that all forward rates have zero value
D. Sometimes A is true and sometimes B is true
70. A bank enters into a 3-year swap with company X where it pays LIBOR and
receives 3.00%. It enters into an offsetting swap with company Y where is receives
LIBOR and pays 2.95%. Which of the following is true:
A. If company X defaults, the swap with company Y is null and void
B. If company X defaults, the bank will be able to replace company X at no
cost
C. If company X defaults, the swap with company Y continues
D. The bank’s bid-offer spread is 0.5 basis points
71. When LIBOR is used as the discount rate:

A. The value of a swap is worth zero immediately after a payment date
B. The value of a swap is worth zero immediately before a payment date
C. The value of the floating rate bond underlying a swap is worth par
immediately after a payment date
D. The value of the floating rate bond underlying a swap is worth par
immediately before a payment date
72. A company enters into an interest rate swap where it is paying fixed and receiving
LIBOR. When interest rates increase, which of the following is true?
A. The value of the swap to the company increases
B. The value of the swap to the company decreases
C. The value of the swap can either increase or decrease
D. The value of the swap does not change providing the swap rate remains the
same
73. A floating for floating currency swap is equivalent to

A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each
currency
74. A floating-for-fixed currency swap is equivalent to

A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each
currency
75. An interest rate swap has three years of remaining life. Payments are exchanged
annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of
payments has just taken place. The one-year, two-year and three-year LIBOR/swap
zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the
value of the swap as a percentage of the principal when LIBOR discounting is
used.
A. 0.00
B. 2.66
C. 2.06
D. 1.06
76. A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-
annual compounding) has a remaining life of nine months. The six-month LIBOR
rate observed three months ago was 4.85% with semi-annual compounding.
Today’s three and nine month LIBOR rates are 5.3% and 5.8% (continuously
compounded) respectively. From this it can be calculated that the forward LIBOR
rate for the period between three- and nine-months is 6.14% with semi-annual
compounding. If the swap has a principal value of $15,000,000, what is the value
of the swap to the party receiving a fixed rate of interest?
A. $74,250
B. −$70,760
C. −$11,250
D. $103,790
77. Which of the following describes the way a LIBOR-in-arrears swap differs from a
plain vanilla interest rate swap?
A. Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears
swap
B. Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
C. No floating interest is paid until the end of the life of the swap in a LIBOR-
in-arrears swap, but fixed payments are made throughout the life of the
swap
D. Neither floating nor fixed payments are made until the end of the life of the
swap
78. In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is

received and 4% on a British pound principal of 100 million pounds is paid. The
current exchange rate is 1.55 dollar per pound. Interest rates in both countries for
all maturities are currently 5% (continuously compounded). Payments are
exchanged every year. The swap has 2.5 years left in its life. What is the value of
the swap?
A. −$7.15
B. −$8.15
C. −$9.15
D. −$10.15
79. Which of the following is a typical bid-offer spread on the swap rate for a plain
vanilla interest rate swap?
A. 3 basis points
B. 8 basis points
C. 13 basis points
D. 18 basis points
80. Which of the following describes the five-year swap rate?

A. The rate on a five-year loan to a AA-rated company
B. The rate on a five-year loan to an A-rated company
C. The rate that can be earned over five years from a series of short-term loans
to AA-rated companies
D. The rate that can be earned over five years from a series of short-term loans
to A-rated companies
Chapter 7: Mechanics of Options Markets

81. Which of the following describes a call option?
I. The right to buy an asset for a certain price
J. The obligation to buy an asset for a certain price
K. The right to sell an asset for a certain price
L. The obligation to sell an asset for a certain price

A. A long call is the same as a short put
B. A short call is the same as a long put
C. A call on a stock plus a stock the same as a put
83. An investor has exchange-traded put options to sell 100 shares for $20. There is a 2
for 1 stock split. Which of the following is the position of the investor after the
stock split?
A. Put options to sell 100 shares for $20
B. Put options to sell 100 shares for $10
C. Put options to sell 200 shares for $10
D. Put options to sell 200 shares for $20
84. An investor has exchange-traded put options to sell 100 shares for $20. There is
25% stock dividend. Which of the following is the position of the investor after the
stock dividend?
A. Put options to sell 100 shares for $20
B. Put options to sell 75 shares for $25
C. Put options to sell 125 shares for $15
D. Put options to sell 125 shares for $16
85. An investor has exchange-traded put options to sell 100 shares for $20. There is a
$1 cash dividend. Which of the following is then the position of the investor?
A. The investor has put options to sell 100 shares for $20
B. The investor has put options to sell 100 shares for $19
C. The investor has put options to sell 105 shares for $19
D. The investor has put options to sell 105 shares for $19.05
86. Which of the following describes a short position in an option?

A. A position in an option lasting less than one month
B. A position in an option lasting less than three months
C. A position in an option lasting less than six months
D. A position where an option has been sold
87. Which of the following describes a difference between a warrant and an exchange-
traded stock option?
A. In a warrant issue, someone has guaranteed the performance of the option seller
in the event that the option is exercised
B. The number of warrants is fixed whereas the number of exchange-traded options
in existence depends on trading
C. Exchange-traded stock options have a strike price
D. Warrants cannot be traded after they have been purchased
88. Which of the following describes LEAPS?

A. Options which are partly American and partly European
B. Options where the strike price changes through time
C. Exchange-traded stock options with longer lives than regular exchange-traded
stock options
D. Options on the average stock price during a period of time
89. Which of the following is an example of an option class?
A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. All calls with a particular time to maturity on a certain stock
D. All calls with a particular time to maturity and strike price on a certain stock
90. Which of the following is an example of an option series?

A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. All calls with a particular time to maturity on a certain stock
D. All calls with a particular time to maturity and strike price on a certain stock
91. Which of the following must post margin?

A. The seller of an option
B. The buyer of an option
C. The seller and the buyer of an option
D. Neither the seller nor the buyer of an option
92. Which of the following describes a long position in an option?

A. A position where there is more than one year to maturity
B. A position where there is more than five years to maturity
C. A position where an option has been purchased
D. A position that has been held for a long time
93. Which of the following is NOT traded by the CBOE?

A. Weeklys
B. Monthlys
C. Binary options
D. DOOM options
94. When a six-month option is purchased

A. The price must be paid in full
B. Up to 25% of the option price can be borrowed using a margin account
C. Up to 50% of the option price can be borrowed using a margin account
D. Up to 75% of the option price can be borrowed using a margin account
95. Which of the following are true for CBOE stock options?
A. There are no margin requirements
B. The initial margin and maintenance margin are determined by formulas and are
equal
C. The initial margin and maintenance margin are determined by formulas and are
different
D. The maintenance margin is usually about 75% of the initial margin
96. The price of a stock is $67. A trader sells 5 put option contracts on the stock with a
strike price of $70 when the option price is $4. The options are exercised when the
stock price is $69. What is the trader’s net profit or loss?
A. Loss of $1,500
B. Loss of $500
C. Gain of $1,500
D. Loss of $1,000
97. A trader buys a call and sells a put with the same strike price and maturity date.
What is the position equivalent to?
A. A long forward
B. A short forward
C. Buying the asset
98. The price of a stock is $64. A trader buys 1 put option contract on the stock with a
strike price of $60 when the option price is $10. When does the trader make a
profit?
A. When the stock price is below $60
B. When the stock price is below $64
C. When the stock price is below $54
D. When the stock price is below $50
99. Consider a put option and a call option with the same strike price and time to
maturity. Which of the following is true?
A. It is possible for both options to be in the money
B. It is possible for both options to be out of the money
C. One of the options must be in the money
D. One of the options must be either in the money or at the money
100. In which of the following cases is an asset NOT considered constructively

sold?
A. The owner shorts the asset
B. The owner buys an in-the-money put option on the asset
C. The owner shorts a forward contract on the asset
D. The owner shorts a futures contract on the stock
Chapter 8: Properties of Stock Options
101. When the stock price increases with all else remaining the same, which of
the following is true?
M. Both calls and puts increase in value
N. Both calls and puts decrease in value
O. Calls increase in value while puts decrease in value
P. Puts increase in value while calls decrease in value
102. When the strike price increases with all else remaining the same, which of
the following is true?
A. Both calls and puts increase in value
B. Both calls and puts decrease in value
C. Calls increase in value while puts decrease in value
D. Puts increase in value while calls decrease in value
103. When volatility increases with all else remaining the same, which of the
following is true?
104. When dividends increase with all else remaining the same, which of the
following is true?
105. When interest rates increase with all else remaining the same, which of the
following is true?
106. When the time to maturity increases with all else remaining the same,
which of the following is true?
A. European options always increase in value
B. The value of European options either stays the same or increases
C. There is no effect on European option values
D. European options are liable to increase or decrease in value
107. The price of a stock, which pays no dividends, is $30 and the strike price
of a one year European call option on the stock is $25. The risk-free rate is 4%
(continuously compounded). Which of the following is a lower bound for the
option such that there are arbitrage opportunities if the price is below the lower
bound and no arbitrage opportunities if it is above the lower bound?
A. $5.00
B. $5.98
C. $4.98
D. $3.98
108. A stock price (which pays no dividends) is $50 and the strike price of a two
year European put option is $54. The risk-free rate is 3% (continuously
compounded). Which of the following is a lower bound for the option such that
there are arbitrage opportunities if the price is below the lower bound and no
arbitrage opportunities if it is above the lower bound?
A. $4.00
B. $3.86
C. $2.86
D. $0.86
109. Which of the following is NOT true? (Present values are calculated from
the end of the life of the option to the beginning)
A. An American put option is always worth less than the present value of the
strike price
B. A European put option is always worth less than the present value of the strike
price
C. A European call option is always worth less than the stock price
D. An American call option is always worth less than the stock price
110. Which of the following best describes the intrinsic value of an option?
A. The value it would have if the owner had to exercise it immediately or not at all
B. The Black-Scholes-Merton price of the option
C. The lower bound for the option’s price
D. The amount paid for the option
111. Which of the following describes a situation where an American put option
on a stock becomes more likely to be exercised early?
A. Expected dividends increase
B. Interest rates decrease
C. The stock price volatility decreases
D. All of the above

A. An American call option on a stock should never be exercised early
B. An American call option on a stock should never be exercised early when no
dividends are expected
C. There is always some chance that an American call option on a stock will be
exercised early
D. There is always some chance that an American call option on a stock will be
exercised early when no dividends are expected
113. Which of the following is the put-call parity result for a non-dividend-
paying stock?
A. The European put price plus the European call price must equal the stock price
plus the present value of the strike price
B. The European put price plus the present value of the strike price must equal the
European call price plus the stock price
C. The European put price plus the stock price must equal the European call price
plus the strike price
D. The European put price plus the stock price must equal the European call price
plus the present value of the strike price
114. Which of the following is true when dividends are expected?

A. Put-call parity does not hold
B. The basic put-call parity formula can be adjusted by subtracting the present
value of expected dividends from the stock price
C. The basic put-call parity formula can be adjusted by adding the present value
of expected dividends to the stock price
D. The basic put-call parity formula can be adjusted by subtracting the dividend
yield from the interest rate
115. The price of a European call option on a non-dividend-paying stock with a

strike price of $50 is $6. The stock price is $51, the continuously compounded risk-
free rate (all maturities) is 6% and the time to maturity is one year. What is the
price of a one-year European put option on the stock with a strike price of $50?
A. $9.91
B. $7.00
C. $6.00
D. $2.09
116. The price of a European call option on a stock with a strike price of $50 is
$6. The stock price is $51, the continuously compounded risk-free rate (all
maturities) is 6% and the time to maturity is one year. A dividend of $1 is expected
in six months. What is the price of a one-year European put option on the stock
with a strike price of $50?
A. $8.97
B. $6.97
C. $3.06
D. $1.12
117. A European call and a European put on a stock have the same strike price
and time to maturity. At 10:00am on a certain day, the price of the call is $3 and
the price of the put is $4. At 10:01am news reaches the market that has no effect on
the stock price or interest rates, but increases volatilities. As a result the price of the
call changes to $4.50. Which of the following is correct?
A. The put price increases to $6.00
B. The put price decreases to $2.00
C. The put price increases to $5.50
D. It is possible that there is no effect on the put price
118. Interest rates are zero. A European call with a strike price of $50 and a
maturity of one year is worth $6. A European put with a strike price of $50 and a
maturity of one year is worth $7. The current stock price is $49. Which of the
following is true?
A. The call price is high relative to the put price
B. The put price is high relative to the call price
C. Both the call and put must be mispriced
119. Which of the following is true for American options?

A. Put-call parity provides an upper and lower bound for the difference between
call and put prices
B. Put call parity provides an upper bound but no lower bound for the difference
between call and put prices
C. Put call parity provides an lower bound but no upper bound for the difference
between call and put prices
D. There are no put-call parity results
120. Which of the following can be used to create a long position in a European
put option on a stock?
A. Buy a call option on the stock and buy the stock
B. Buy a call on the stock and short the stock
C. Sell a call option on the stock and buy the stock
D. Sell a call option on the stock and sell the stock
Chapter 9: Trading Strategies Involving Options

121. Which of the following creates a bull spread?
Q. Buy a low strike price call and sell a high strike price call
R. Buy a high strike price call and sell a low strike price call
S. Buy a low strike price call and sell a high strike price put
T. Buy a low strike price put and sell a high strike price call
122. Which of the following creates a bear spread?

A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
123. Which of the following creates a bull spread?

A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
124. Which of the following creates a bear spread?

A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
125. What is the number of different option series used in creating a butterfly
spread?
A. 1
B. 2
C. 3
D. 4
126. A stock price is currently $23. A reverse (i.e short) butterfly spread is
created from options with strike prices of $20, $25, and $30. Which of the
following is true?
A. The gain when the stock price is greater that $30 is less than the gain when the
stock price is less than $20
B. The gain when the stock price is greater that $30 is greater than the gain when
the stock price is less than $20
C. The gain when the stock price is greater that $30 is the same as the gain when
the stock price is less than $20
D. It is incorrect to assume that there is always a gain when the stock price is
greater than $30 or less than $20
127. Which of the following is correct?

A. A calendar spread can be created by buying a call and selling a put when the
strike prices are the same and the times to maturity are different
B. A calendar spread can be created by buying a put and selling a call when the
C. A calendar spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D. A calendar spread can be created by buying a call and selling a call when the
128. What is a description of the trading strategy where an investor sells a 3-
month call option and buys a one-year call option, where both options have a strike
price of $100 and the underlying stock price is $75?
A. Neutral Calendar Spread
B. Bullish Calendar Spread
C. Bearish Calendar Spread
129. Which of the following is correct?

A. A diagonal spread can be created by buying a call and selling a put when the
B. A diagonal spread can be created by buying a put and selling a call when the
C. A diagonal spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D. A diagonal spread can be created by buying a call and selling a call when the
130. Which of the following is true of a box spread?

A. It is a package consisting of a bull spread and a bear spread
B. It involves two call options and two put options
C. It has a known value at maturity
D. All of the above
131. How can a straddle be created?

A. Buy one call and one put with the same strike price and same expiration date
B. Buy one call and one put with different strike prices and same expiration date
C. Buy one call and two puts with the same strike price and expiration date
D. Buy two calls and one put with the same strike price and expiration date
132. How can a strip trading strategy be created?

133. How can a strap trading strategy be created?
134. How can a strangle trading strategy be created?

135. Which of the following describes a protective put?

A. A long put option on a stock plus a long position in the stock
B. A long put option on a stock plus a short position in the stock
C. A short put option on a stock plus a short call option on the stock
D. A short put option on a stock plus a long position in the stock
136. Which of the following describes a covered call?

A. A long call option on a stock plus a long position in the stock
B. A long call option on a stock plus a short put option on the stock
C. A short call option on a stock plus a short position in the stock
D. A short call option on a stock plus a long position in the stock
137. When the interest rate is 5% per annum with continuous compounding,
which of the following creates a principal protected note worth $1000?
A. A one-year zero-coupon bond plus a one-year call option worth about $59
B. A one-year zero-coupon bond plus a one-year call option worth about $49
C. A one-year zero-coupon bond plus a one-year call option worth about $39
D. A one-year zero-coupon bond plus a one-year call option worth about $29
138. A trader creates a long butterfly spread from options with strike prices $60,
$65, and $70 by trading a total of 400 options. The options are worth $11, $14, and
$18. What is the maximum net gain (after the cost of the options is taken into
account)?
A. $100
B. $200
C. $300
D. $400
139. A trader creates a long butterfly spread from options with strike prices $60,
$65, and $70 by trading a total of 400 options. The options are worth $11, $14, and
$18. What is the maximum net loss (after the cost of the options is taken into
account)?
A. $100
B. $200
C. $300
D. $400
140. Six-month call options with strike prices of $35 and $40 cost $6 and $4,
respectively. What is the maximum gain when a bull spread is created by trading a
total of 200 options?
A. $100
B. $200
C. $300
D. $400
Chapter 10: Futures Options

141. Which of the following is acquired (in addition to a cash payoff) when the
holder of a put futures exercises?
U. A long position in a futures contract
V. A short position in a futures contract
W. A long position in the underlying asset
X. A short position in the underlying asset
142. Which of the following is acquired (in addition to a cash payoff) when the
holder of a call futures exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset
143. The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%.
Which of the following is correct when a futures option on the index is being
valued?
A. The futures price of the S&P 500 is treated like a stock paying a dividend yield
of 5%.
B. The futures price of the S&P 500 is treated like a stock paying a dividend yield
of 2%.
C. The futures price of the S&P 500 is treated like a stock paying a dividend yield
of 3%.
D. The futures price of the S&P 500 is treated like a non-dividend-paying stock.
144. Which of the following is NOT true?

A. Black’s model can be used to value an American-style option on futures
B. Black’s model can be used to value a European-style option on futures
C. Black’s model can be used to value a European-style option on spot
D. Black’s model is widely used by practitioners
145. Which of the following is true when the futures price exceeds the spot
price?
A. Calls on futures should never be exercised early
B. Put on futures should never be exercised early
C. A call on futures is always worth at least as much as the corresponding call on
spot
D. A call on spot is always worth at least as much as the corresponding call on
futures
146. Which of the following describes a futures-style option?

A. An option on a futures
B. An option on spot with daily settlement
C. A futures on an option payoff
147. A futures price is currently 40 cents. It is expected to move up to 44 cents

or down to 34 cents in the next six months. The risk-free interest rate is 6%. What
is the probability of an up movement in a risk-neutral world?
A. 0.4
B. 0.5
C. 0.72
D. 0.6

is the value of a six-month put option with a strike price of 37 cents?
A. 3.00 cents
B. 2.91 cents
C. 1.16 cents
D. 1.20 cents

is the value of a six month call option with a strike price of 39 cents?
A. 5.00 cents
B. 2.91 cents
C. 3.00 cents
D. 4.21 cents
150. Which of the following are true?

A. Futures options are usually European
B. Futures options are usually American
C. Both American and European futures options trade actively are exchanges
D. Both American and European futures options trade actively in the OTC market
151. Which of the following is true for a September futures option?

A. The expiration month of option is September
B. The option was first traded in September
C. The delivery month of the underlying futures contract is September
D. September is the first month when the option can be exercised
152. What is the cash settlement if a put futures option on 50 units of the
underlying asset is exercised?
A. (Current Futures Price – Strike Price) times 50
B. (Strike Price – Current Futures Price) times 50
C. (Most Recent Futures Settlement Price – Strike Price) times 50
D. (Strike Price – Most Recent Futures Settlement Price) times 50
153. What is the cash component of the payoff if a call futures option on 50 units
of the underlying asset is exercised?
A. (Current Futures Price – Strike Price) times 50
B. (Strike Price – Current Futures Price) times 50
C. (Most Recent Futures Settlement Price – Strike Price) times 50
D. (Strike Price – Most Recent Futures Settlement Price) times 50

A. A futures option is settled daily
B. A futures-style option is settled daily
C. Both a futures option and a futures-style option are settled daily
D. Neither a futures option nor a futures-style option is settled daily
155. Which of the following is true about a futures option and a spot option on
the same underlying asset when they have the same strike price? The expiration
dates of the two options and the futures are all the same.
A. A European call spot option and an American call futures option are equivalent
B. An American call spot option and a European call futures option are equivalent
C. A European put spot option and European put futures option are equivalent
D. An American put spot option and American put futures option are equivalent
156. What is the value of a European call futures option where the futures price
is 50, the strike price is 50, the risk-free rate is 5%, the volatility is 20% and the
time to maturity is three months?
A. 49.38N(0.05)-49.38N(-0.05)
B. 50N(0.05)-50N(-0.05)
C. 49.38N(0.1)-49.38N(-0.1)
D. 50N(0.1)-49.38N(-0.1)
157. What is the expected growth rate of an index futures price in the risk-
neutral world?
A. The excess of the risk-free rate over the dividend yield
B. The risk-free rate
C. The dividend yield on the index
D. Zero
158. When Black’s model used to value a European option on the spot price of
an asset, which of the following is NOT true?
A. It is necessary to know the futures or forward price for a contract maturing at
the same time as the option
B. It is not necessary to estimate income on the underlying asset
C. It is not necessary to know the risk-free rate
D. The underlying asset can be an investment or a consumption asset
159. Consider a European one-year call futures option and a European one-year
put futures options when the futures price equals the strike price. Which of the
following is true?
A. The call futures option is worth more than the put futures option
B. The put futures option is worth more than the call futures option
C. The call futures option is sometimes worth more and sometimes worth less
than the put futures option
D. The call futures option is worth the same as the put futures option
160. One-year European call and put options on an asset are worth $3 and $4
respectively when the strike price is $20 and the one-year risk-free rate is 5%.
What is the one-year futures price of the asset if there are no arbitrage
opportunities? (Use put-call parity.)
A. $19.55
B. $18.95
C. $20.95
D. $20.45
Chapter 11: Basic Numerical Procedures

1. How many nodes are there at the end of a Cox-Ross-Rubinstein five-step binomial
tree?
A. 4
B. 5
C. 6
D. 7
2. Which of the following cannot be estimated from a single binomial tree?
A. delta
B. gamma
C. theta
D. vega
3. Which of the following is true for u in a Cox-Ross-Rubinstein binomial tree?

A. It depends on the interest rate and the volatility
B. It depends on the volatility but not the interest rate
C. It depends on the interest rate but not the volatility
D. It depends on neither the interest rate nor the volatility
4. How many different paths are there through a Cox-Ross-Rubinstein tree with four-
steps?
A. 5
B. 9
C. 12
D. 16
5. When we move from assuming no dividends to assuming a constant dividend
yield, which of the following is true for a Cox, Ross, Rubinstein tree?
A. The parameters u and p change
B. p changes but u does not
C. u changes but p does not
D. Neither p nor u changes
6. When the stock price is 20 and the present value of dividends is 2, which of the
following is the recommended way of constructing a tree?
A. Draw a tree for an initial stock price of 20 and subtract the present value of
future dividends at each node
B. Draw a tree for an initial stock price of 22 and subtract the present value of
C. Draw a tree with an initial stock price of 18 and add the present value of
D. Draw a tree with an initial stock price of 18 and add 2 at each node
7. What is the recommended way of making interest rates a function of time in a

Cox, Ross, Rubinstein tree?
A. Make u a function of time
B. Make p a function of time
C. Make u and p a function of time
D. Make the lengths of the time steps unequal
8. What is the recommended way of making volatility a function of time in a Cox,

Ross, Rubinstein tree?
A. Make u a function of time
B. Make p a function of time
C. Make u and p a function of time
D. Make the lengths of the time steps unequal
9. A binomial tree prices an American option at $3.12 and the corresponding

European option at $3.04. The Black-Scholes price of the European option is
$2.98. What is the control variate price of the American option?
A. $3.06
B. $3.18
C. $2.90
D. $3.08
10. The chapter discusses an alternative to the Cox, Ross, Rubinstein tree. In this
alternative, which of the following are true:
A. The relationship between u and d is: u=1/d
B. The relationship between u and d is: u-1=1-d
C. The probabilities on the tree are all 0.5
11. Which of the following cannot be valued by Monte Carlo simulation

A. European options
B. American options
C. Asian options (i.e., options on the average stock price)
D. An option which provides a payoff of $100 if the stock price is greater than
the strike price at maturity

A. The implicit finite difference method relates prices at one node to three prices
at nodes at a later time
B. The implicit finite difference method relates prices at one node to three prices
at nodes at an earlier time
C. The implicit finite difference method relates prices at one node to three prices
at nodes at the same time

A. The implicit finite difference method is equivalent to using a trinomial tree
B. The explicit finite difference method is equivalent to using a trinomial tree
C. Both methods are equivalent to using a trinomial tree
D. Neither method is equivalent to using a trinomial tree
14. The standard deviation of the values of an option calculated using 10,000 Monte
Carlo trials is 4.5. The average of the values is 20. What is the standard error of
this as an estimate of the option price?
A. 4.5
B. 0.45
C. 0.045
D. 0.0045
15. The values of a stock price at the end of the second time step are $80, $100, $125.
The corresponding values of an option are $0, $5, and $20 respectively. What is an
estimate of gamma?
A. 0.136
B. 0.146
C. 0.156
D. 0.166
16. What is the difference between valuing an American and a European option using
a tree?
A. The value of u is higher for American options
B. The value of u is lower for American options
C. The time steps for American options are not equal
D. It is necessary to do two calculations at nodes where the option is in the
money
17. A European option on a stock with a known dollar dividend is valued by setting
the stock price variable equal to the stock price minus the present value of the
dividend in the Black-Scholes-Merton formula. A second price can be obtained
using the tree building procedure in the chapter. Which of the following is true
when a very large number of time steps are used in the tree?
A. The first price is higher than the second price
B. The first price is lower than the second price
C. The first price is sometimes higher and sometimes lower than the second
price
D. The two prices are almost exactly the same
18. Which of the following is possible in a modified Cox, Ross, Rubinstein binomial
tree?
A. The interest rate and volatility can both be functions of time
B. The interest rate or the volatility can be a function of time, but not both
C. The interest rate can be a function of time but the volatility cannot
D. The interest rate and volatility must be constant
19. Which of the following describes the way that the parameters in a binomial tree
are chosen?
A. The expected return during each time step is the risk-free rate
B. The standard deviation of the return in each time step is, for small time steps,
almost exactly equal to the volatility per annum times the square root of the
length of the time step in years
C. The tree recombines
D. All of the above
20. Which of the following can be valued without using a numerical procedure such as
a binomial tree?
A. American put options on a non-dividend paying stock
B. American call options on a non-dividend paying tock
C. American call options on a currency
D. American put options on futures

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Chapter 1: Introduction

1. A one-year forward contract is an agreement where

2. Which of the following is NOT true

9. Which of the following describes European options?

10. Which of the following is NOT true

20. Which of the following best describes a central clearing party

1. Which of the following is true

2. Which of the following is NOT true

7. Who initiates delivery in a corn futures contract

9. A hedger takes a long position in a futures contract on a commodity on November 1, 2012

10. A speculator takes a long position in a futures contract on a commodity on November 1,

12. Margin accounts have the effect of

The CFTC has primary responsibility for regulating futures markets

15. Clearing houses are

16. A haircut of 20% means that

18. Which of the following best describes central clearing parties

19. Which of the following are cash settled

20. A limit order

8. Which of the following is true?

9. Which of the following describes tailing the hedge?

12. Which of the following best describes “stack and roll”?

13. Which of the following increases basis risk?

15. Which of the following does NOT describe beta?

16. Which of the following is true?

17. Which of the following is necessary for tailing a hedge?

18. Which of the following is true?

Chapter 4: Determination of Forward and Futures Prices

21. Which of the following is a consumption asset?

26. Which of the following is true?

32. Which of the following is NOT true?

35. As the convenience yield increases, which of the following is true?

36. As inventories of a commodity decline, which of the following is true?

37. Which of the following describes a known dividend yield on a stock?

38. Which of the following is an argument used by Keynes and Hicks?

39. Which of the following describes contango?

40. Which of the following is true for a consumption commodity?

41. Which of following is applicable to corporate bonds in the United States?

48. An ultra T-bond futures contract is one where

50. Which of the following is true?

51. How much is a basis point?

53. What is the quoted discount rate on a money market instrument?

55. Which of the following is NOT true about duration?

56. The conversion factor for a bond is approximately

60. Duration matching immunizes a portfolio against

62. Which of the following is true?

Fixed Rate Floating Rate

64. Which of the following describes the five-year swap rate?

65. Which of the following is a use of a currency swap?

66. The reference entity in a credit default swap is

67. Which of the following describes an interest rate swap?

68. Which of the following is true for an interest rate swap?

71. When LIBOR is used as the discount rate:

73. A floating for floating currency swap is equivalent to

74. A floating-for-fixed currency swap is equivalent to

78. In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is

80. Which of the following describes the five-year swap rate?

Chapter 7: Mechanics of Options Markets

82. Which of the following is true?

86. Which of the following describes a short position in an option?

88. Which of the following describes LEAPS?

90. Which of the following is an example of an option series?

91. Which of the following must post margin?

92. Which of the following describes a long position in an option?

93. Which of the following is NOT traded by the CBOE?