Options Futures And Other Derivatives 9th Edition By John C. Hull – Test Bank

Options Futures And Other Derivatives 9th Edition By John C. Hull – Test Bank

Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 10: Mechanics of Options Markets
Multiple Choice Test Bank: Questions with Answers

1. Which of the following describes a call option?
A. The right to buy an asset for a certain price
B. The obligation to buy an asset for a certain price
C. The right to sell an asset for a certain price
D. The obligation to sell an asset for a certain price

Answer: A

A call option is the right, but not the obligation to buy.

2. Which of the following is true?
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
D. None of the above

Answer: D

None of the statements are true. Long calls, short calls, long puts, and short puts all have different payoffs as indicated by Figure 10.5. A put on a stock plus the stock provides a payoff that is similar to a call, as explained in Chapters 11 and 12. But a call on a stock plus a stock does not provide a similar payoff to a put.

3. 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

Answer: C

When there is a stock split the number of shares increases and the strike price decreases. In this case, because it is a 2 for 1 stock split, the number of shares doubles and the strike price halves.
4. 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

Answer: D

The stock dividend is equivalent to a 5 for 4 stock split. The number of shares goes up by 25% and the strike price is reduced to 4/5 of its previous value.

5. 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

Answer: A

Cash dividends unless they are unusually large have no effect on the terms of an option.

6. 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

Answer: D

A short position is a position where the option has been sold (the opposite to a long position).

7. 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

Answer: B

A warrant is a fixed number of options issued by a company. They often trade on an exchange after they have been issued.

8. 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

Answer: C

LEAPS are long-term equity anticipation securities. They are exchange-traded options with relatively long maturities.

9. 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

Answer: A

An option class is all calls on a certain stock or all puts on a certain stock.

10. 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

Answer: D