Fundamentals of Futures and Options Markets

Topics: Futures contract, Forward contract, Derivative Pages: 14 (3243 words) Published: February 9, 2014
Fundamentals of Futures and Options Markets, 8e (Hull)
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 Answer: B
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
Answer: A
3) 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 Answer: D

4) 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
Answer: A
5) 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 Answer: B

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6) 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
Answer: B
7) Which of the following is NOT true?
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 Answer: C

8) 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

Answer: A
9) A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contract 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
Answer: B
10) 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
Answer: B

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