Hull: Options, Futures, and Other Derivatives, Ninth Edition, Chapter 18: Futures Options Multiple Choice Test Bank: Questions with Answers Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures exercises? ALA a inion Ina futures contract C. Along position in the underlying asset ._A short position in the underlying asset Answer: B. The holder ofthe put acquires a short futures position Sieh iniselatey ese SURE whieh ofthe ftowing is acqured (in addon toa cash payoff) when the holder of cal futures cercses? ‘A short position in a futures contract ‘Along position in the underlying asset ‘A shart position in the underlying asset Answer A The holder of the call acquires a long futures position which can be Immediately closed out if desired The risefee rateleS% and the dividend yiels on the S&P SOD Index ic 2%, Which ofthe following is correct when a futures option onthe index is being valued? B. The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%. (C._The futures price af the S&P 500 is treated lke 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. Answer A ‘When @ futures option is being valued the dividend yield is set equal to the domestic risk-tree rate In this case tHe MGneSie ke rESTARAIESHE Ais thorofore correct. is NOT true’ which ofthe fotow 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 spatD._ Black’s model is widely used by practitioners Answer: Black’s model is used for valuing European options. A is therefore clearly false. 1B Which ofthe folowing true when the futures price exceeds the spot price? Cals on futures should never be exercised early Put on futures should never be exerisd ear ‘Baal on spot is always worth at least as much as the corresponding call on futures Answer: C 1B Whicr of the folowing describes a futuresstyle option? ‘A Aneption ona futures B._An option on spot with dal settlement D. None of the above Answer: C ‘A futures style option isa futures contract on the option payott 1 Atururs pric is curently 40 cents It isexpectd to move up to 4 conte or down to 34 centsn the next sk months. The risk-free interes rate 6%, What ls the probabilty of an up movement inaiseneutal wold? oa os 07 Answer: D ‘The probability of an up movement is (I-d/(u-d) In this case wis 1.1 and dis 0.5, The probability of an up movement A tures price te current 40 cents, is expected ta move up 044 cents or dwn 34 cents in the next sixmonths. Theriskfree interest rate I 6%, What ls the value of a sixmonth put option with a site price of 7 cents? 3.00 cents 231 cents 1.20 centsPa The party exercising also gets a short futures positian which brings the value of whats received a the time of exercise equal to fergie ern TUUReS ICE [Bl wat isthe cath component ofthe payoif cal futures option on 0 units ofthe underyng assets erised? (Current Futures Price ~ Strike Price) times 50 [stk Pice~ curent Futures Price) times SO [strike Price ~ Most Recent Futures Settlement Price) times 50 Answer: ¢ When the option is exercised the holder obtains the cash payoff in C and a ong futures contract. 1H which ofthe folowing struc? [Atutures option settled daly Both a futures option and a futures-style option are settled daily Neither a futures option nor a futures-stye option is settled dally Answer: 8 A futures style like a futures contract is settled dally. Regular options are not settled dally. |BB whieh ofthe foloning i true about a futures option and a spot option on the same underlying asset when thy have the same srk pic? The expiration dates ofthe two options an the futures areal he same ’ European call spot option and an American call futures option are equtvalent ‘An American call pot option and a European call futures option are equlvalant 'An American put spot option and American put futures option are equivalent Answer: € ‘The two European options are equivalent. This results often used to price options on spot. 1 what isthe vue of» European cl futures option where he futures price is 50, the strike price the risk ee rates Sx, the volatity is 20% andthe time to maturty Is three months? F 50N(0.05)-SON'-0.05)49.3ttN(0.1)-49.3ttN(-0.1) SON(0.1)-49.3ttN(-0.1) Answer: A ‘The formula is Fe TN) Ke™Nd) Ink K)+0°T/2 a, Myo r/2 - oT J ovr : Inthiscase Ke''” 5 asen3s g, =!) 0.2" x0.25/2 " 02N025 ‘The correct answer is therefore A, 0.05 0.05 The excess ofthe risk-free rate over the dividend yield The risk-free rate The dividend yield on the index Answer: D |HE When Black’ model used to value a European option on the spot price of an asset, which ofthe following is NOT true? [A Itisnecessary to know the futures or forward price fora contract maturing a the same time as the option Its not necessary to estimate Income on the underlying asset The underlying asset can be an investment ar a consumption asset Answer: C |B consider a European one-year cal futures option anda European one-year put futures options The call futures option is worth more than the put futures option The put futures option is worth more than the cal futures option ‘The call futures option is sometimes worth more and sometimes worth less than the put futures option