1. Which option gives the right to buy an underlying asset at a fixed price?
a. Binomial option.
b. Put option.
c. Call option.
d. European option.
e. American option.
2. Which option gives the right to sell an underlying asset at a fixed price?
a. Call option.
b. Put option.
c. Binomial option.
d. European option.
e. American option.
3. Which of the following statements about spot prices (S) and future prices (F) is correct?
a. F and S are never equal
b. There is no relationship between F and S.
c. F is always equal to S.
d. F = f(S plus carrying costs).
e. S is always greater than F.
4. In Australia the SPI future has a value of $25 per point of the index. If you go long the SPI at 4500 and the price closes for the day at 4510 then your account balance would
a. increase by $25
b. decrease by $250
c. not change because marking to market only occurs when you close out
d. decrease by $25
e. increase by $250
5. The value of an option, if exercised immediately, is known as:
a. time value
b. present value
c. future value
d. intrinsic value
e. strike value
6. The value of an option in excess of its intrinsic value is known as:
a. strike value
b. excess value
c. exercise value
d. time value
e. current value
7. If the share price at the expiry of a call option is less than the exercise price, the call is worth:
a. zero.
b. the original price paid for the option.
c. the market price of the share.
d. an undefined amount.
e. the difference between the exercise price and the share price.
8. Which of the following items are correct with respect to Futures? There may be more than one correct .
I. An important function of a futures clearing house is to minimise default
II. Futures can be used to hedge risk, speculate on price and to perform riskless arbitrage.
III. The futures clearing house guarantees all its futures contracts whether they are long or short.
IV. An important difference between a forwards and a futures is that futures are marked to market.
V. Most futures contracts do not go to delivery.
9. Which of the following enables an arbitrage profit to be made (excluding transaction costs) from a call option if the market price of the underlying share is $5.50, the price of the call is $1.50, and the exercise price is $3.80?
a. Buy a put option, exercise it and buy the underlying share.
b. Buy a call option and hold onto it until expiry.
c. Buy the call option, exercise it and sell the underlying share.
d. An arbitrage profit cannot be made.
e. Sell a put option now and realise the profit.
10. An option that gives the buyer the right to exercise at any time up to the expiry date is called:
a. a call option.
b. an American option.
c. a European option.
d. a put option.
e. a Bermuden option
11. At expiry, a call option is worth:
a. the maximum of the share price minus the exercise price and zero, Max [S-X,0].
b. at least the exercise price.
c. at least the share price.
d. the maximum of the exercise price minus the share price and zero, Max [X-S,0].
e. the minimum of the share price minus the exercise price and zero, Min [S-X,0].
12. What is the payoff of a long call option with an exercise price of $15.00, if the underlying share price is $16.50, at the expiry date of the option? The option was purchased for $1.20.
a. Zero
b. $1.50
c. $15.00
d. $1.00
e. 30 cents
f. $16.5
13. For a long put option (bought) with an exercise price of $9.50, the maximum payoff is:
a. infinite.
b. $5.00
c. not enough information given to be able to calculte
d. $9.50
e. Zero
14. The writer of the option is the:
a. buyer of the call option
b. owner of the option
c. buyer of the put option
d. seller of the option
e. both buyer of the put option and buyer of the call option
15. The higher the risk free rate, the:
a. higher the value of the call option
b. value of the option does not change
c. value of the call is one-half the value of a put
d. higher the value of the put option
e. lower the value of the call option
16. A trading opportunity that offers a riskless profit is called a(n):
a. arbitrage opportunity
b. swap opportunity
c. intrinsic opportunity
d. hedging opportunity
e. forward opportunity
17. It is January. Lan-wool is a manufacturer of woolen jumpers. Mary, the manager of Lan-wool, will need to purchase 7,500kg of wool in September. Mary is worried the market price of wool may increase in the future.
What sort of transactions should Mary undertake in order to hedge her risk using futures?
a. Take a long position in September wool futures in January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September.
b. Take a long position in September wool futures in January, close out by taking a short position in wool futures in September and buy wool in the marketplace in September.
c. Take a long position in the futures market in January fixing the price and take delivery of the contract in September.
d. Take a short position in September wool futures in January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September.
e. Take a short position in the futures market in January and deliver the contract in September.
18. Identify the profit/loss on this transaction:
You buy a call option on a share at an exercise price of $34 for a premium of $1.79 per share. The price of the share goes to $38.
a. zero profit/loss
b. Net profit of $2.21
c. Net loss of $5.79
d. Net loss of $2.21
e. Net profit of $5.79
19. You are worried about the price of oil decreasing, as you are an oil supplier, and decide to hedge your risk by using futures contracts (you need 10 contracts, each for 1000 barrels). Based on the following information, what is your gain/loss on futures trading? And what is the effective price of oil per barrel from your hedging strategy?
• Now it is May and the current market price is $125 a barrel
• in May the October futures price is $120 a barrel
• in September you need to close out from your futures contracts; the current market price for oil is $113 a barrel and the October futures price is $112 a barrel.
a. Loss on futures of $50,000 and effective price of $112 per barrel.
b. Gain on futures of $50,000 and effective price of $113 per barrel.
c. Loss on futures of $80,000 and effective price of $112.20 per barrel.
d. Gain on futures of $80,000 and effective price of $120 per barrel.
e. Gain on futures of $80,000 and effective price of $121 per barrel.
20. Identify the profit/loss on this transaction:
You buy two call options on a share at an exercise price of $34 for a premium of $1.79 per share.You write a put on a share at an exercise price of $33 for a premium of $1.63.
The price of the share goes to $60. All options have the same maturity date and are on the same underlying share.
a. Net loss of $53.95
b. Net profit of $53.95
c. Net Profit of $46.79
d. Net profit of $50.05
e. Net loss of $50.05
21. Identify the profit/loss on this transaction:
You write a put on a share at an exercise price of $33 for a premium of $1.63. The price of the share goes to $38 at maturity.
a. Net profit of $3.37
b. Net loss of $3.37
c. Net profit of $1.63
d. Net profit of $5.00
e. Net loss of $1.63
22. Given the following data on a European Call calculate the value of a European Put option with the same exercise price and maturity as the Call:
c = 4.15
Rf = .08 continuous pa
T = six months
X = 15
S = 18
a. .58 or 58 cents
b. 0
c. .56 or 56 cents
d. 7.38
e. 5.60