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Hull: Fundamentals of Futures and Options Markets, Ninth Edition
Chapter 15: Options on Stock Indices and Currencies
Multiple Choice Test Bank
1. Which of the following describes what a company should do to create a range forward contract
in order to hedge foreign currency that will be received?
A. Buy a put and sell a call on the currency with the strike price of the put higher than that
of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than that
of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher than that
of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than that
of the call
2. Which of the following describes what a company should do to create a range forward contract
in order to hedge foreign currency that will be paid?
A. Buy a put and sell a call on the currency with the strike price of the put higher than that
of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than that
of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher than that
of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than that
of the call
3. What should the continuous dividend yield be replaced by when options on an exchange rate are
valued using the formula for an option of a stock paying a continuous dividend yield?
A. the domestic risk-free rate
B. the foreign risk-free rate
C. the foreign risk-free rate minus the domestic risk-free rate
D. none of the above
Copyright© John Hull. All rights reserved. 2016
4. Suppose that the domestic risk free rate is r and dividend yield on an index is q. How should the
put-call parity formula for options on a non-dividend-paying stock be changed to provide a put-
call parity formula for options on a stock index? Assume the options last T years.
A. The stock price is replaced by the value of the index multiplied by exp(qT)
B. The stock price is replaced by the value of the index multiplied by exp(rT)
C. The stock price is replaced by the value of the index multiplied by exp(-qT)
D. The stock price is replaced by the value of the index multiplied by exp(-rT)
5. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices
might decline rapidly during the next six months and would like to use options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently standing
at 500 and each contract is on 100 times the index. What position is required if the portfolio has
a beta of 1?
A. Short 200 contracts
B. Long 200 contracts
C. Short 100 contracts
D. Long 100 contracts
6. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently standing
at 500 and each contract is on 100 times the index. What should the strike price of options on
the index be the portfolio has a beta of 1?
A. 425
B. 450
C. 475
D. 500
Copyright© John Hull. All rights reserved. 2016
7. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently standing
at 500 and each contract is on 100 times the index. What position is required if the portfolio has
a beta of 0.5?
A. Short 200 contracts
B. Long 200 contracts
C. Short 100 contracts
D. Long 100 contracts
8. A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently standing
at 500 and each contract is on 100 times the index. What should the strike price of options on
the index be the portfolio has a beta of 0.5? Assume that the risk-free rate is 10% per annum and
the dividend yield on both the portfolio and the index is 2% per annum.
A. 400
B. 410
C. 420
D. 430
9. For a European put option on an index, the index level is 1,000, the strike price is 1050, the time
to maturity is six months, the risk-free rate is 4% per annum, and the dividend yield on the index
is 2% per annum. How low can the option price be without there being an arbitrage opportunity?
A. $50.00
B. $43.11
C. $29.21
D. $39.16
Copyright© John Hull. All rights reserved. 2016
18. What is the size of one option contract on the S&P 500?
A. 250 times the index
B. 100 times the index
C. 50 times the index
D. 25 times the index
19. The domestic risk-free rate is 3%. The foreign risk-free rate is 5%. What is the risk-neutral growth
rate of the exchange rate?
A. +2%
B. -2%
C. +5%
D. +3%
20. What is the same as 100 call options to buy one unit of currency A with currency B at a strike
price of 1.25?
A. 100 call options to buy one unit of currency B with currency A at a strike price of 0.8
B. 125 call options to buy one unit of currency B with currency A at a strike price of 0.8
C. 100 put options to sell one unit of currency B for currency A at a strike price of 0.8
D. 125 put options to sell one unit of currency B for currency A at a strike price of 0.8
