37) An agreement that grants its owner the right, but not the obligation, to buy or sell a specific
asset at a specific price for a set period of time is called a(n) ________ contract.
A) option
B) forward
C) futures
D) swap
E) spot
38) Sue has a contract that grants her a right that she may or may not decide to exercise. This
right increases in value as the value of the asset underlying her contract declines. Which one of
these did she do to create this situation?
A) Purchased a call option
B) Purchased a put option
C) Purchased and simultaneously sold the same call option
D) Sold a call option
E) Sold a put option
39) Steve has an option with a payoff profile that depicts a line that is constant at zero up until
some point after which the line slopes downward. What type of action did Steve take to obtain
this profile?
A) Purchased a call option
B) Purchased a put option
C) Sold a call option
D) Sold a put option
E) Purchased and simultaneously sold the same call option
40) A call option contract:
A) obligates both the buyer and the seller.
B) obligates the buyer but not the seller.
C) grants rights to the buyer and obligates the seller.
D) grants rights to the seller and obligates the buyer.
E) grants rights to both the buyer and the seller but does not obligate either party.
41) The buyer of an option contract:
A) receives the option premium in exchange for an obligation to either buy or sell an underlying
asset.
B) pays an option premium in exchange for a right to buy or sell an underlying asset during a
specified period of time.
C) pays the strike price at the time the option is purchased and in exchange receives the right to
exercise the option at any time during the option period.
D) receives the option premium in exchange for guaranteeing the purchase or sale of an
underlying asset if called upon to do so.
E) pays the option premium in exchange for receiving the strike price at a later date.
42) A firm with a variable-rate loan wants to protect itself solely from increases in interest rates.
Which one of the following would be of most interest to this firm?
A) Create an interest rate collar
B) Create an interest rate floor
C) Buy a put option on interest rates
D) Enter a currency futures contract
E) Buy a put option on a bond
43) If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will
always:
A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than, or equal to, the cap but lower than, or equal to, the floor.
E) be higher than, or equal to, the floor but lower than, or equal to, the cap.
44) Which one of the following actions will provide you with the right, but not the obligation, to
sell the underlying asset at a specified price during a specified period of time?
A) Purchase of a call option
B) Sale of a call option
C) Purchase of a put option
D) Sale of a put option
E) Swap
45) Which one of the following actions obligates you only on the expiration date to sell an asset
at the strike price if the option is exercised?
A) Writing an American call
B) Buying an American put
C) Writing a European call
D) Buying a European put
E) Entering a European swap
46) Which one of the following statements concerning option payoffs is correct?
A) The buyer of a call profits when the exercise price exceeds the market price.
B) The buyer of a call profits when the strike price exceeds the exercise price.
C) A put will only be exercised if both the seller and the buyer can profit.
D) Both the buyer and the seller profit when a call is exercised.
E) The seller of a put incurs a loss when a put is exercised.
47) You believe the price of an asset is going to increase within the next three months. Which
one of the following payoff profiles for an option on that asset will reflect a profit if your belief
is correct?
A) Buying a put
B) Selling a call
C) Buying a call
D) Selling a put
E) Selling both a call and a put
48) You own shares of a stock and believe the stock price will increase in the future. However,
you realize the stock price could decline and want to hedge that risk. Which one of the following
option positions should you take to create the desired hedge?
A) Buy a call
B) Sell a call
C) Buy a put
D) Sell a put
E) No option position will create the desired hedge.
49) Most of the evidence to date indicates that firms with which two of the following
characteristics are most apt to frequently use derivatives?
A) Low financial distress costs and constrained access to capital markets
B) Small in size and low financial distress costs
C) Easy access to capital markets and high financial distress costs
D) High financial distress costs and constrained access to capital markets
E) High financial distress costs and easy access to capital markets
50) American option contracts:
A) are exercised at the discretion of the contract seller.
B) obligate the buyer but not the seller.
C) can be exercised on any day up to and including the expiration date.
D) are marked to market on a daily basis.
E) are only available on publicly traded stocks.
51) When a futures call option on a commodity is exercised the option owner receives a futures
contract on the commodity plus a cash payment equal to the difference between the:
A) current options price and the current futures price.
B) spot and forward futures prices.
C) strike price on the option and the current futures price.
D) exercise price and the current options price.
E) exercise price and the strike price.
52) The cost to purchase an option contract is called the:
A) strike price.
B) rights price.
C) premium.
D) exercise price.
E) payoff price.
53) Futures option quotes include an apostrophe. This apostrophe indicates the contracts are
traded:
A) only at the end of day price.
B) weekly.
C) in eighths.
D) in 64ths.
E) in 32nds.
54) An interest rate cap is actually a:
A) forward contract on interest rates.
B) put option on a bond.
C) call option on an interest rate.
D) deferred interest rate swap.
E) put option on an interest rate.
55) You would like the right to purchase an interest rate cap in the future. To obtain this right,
you should purchase a:
A) floor.
B) swap.
C) caption.
D) collar.
E) hat.
56) In any one year, the chance that you will incur a loss of $10 million is .02 percent.
Otherwise, you will have zero loss. What is your expected loss?
A) $20,000
B) $200,000
C) $2,000
D) $200
E) $2,000,000
57) Silver futures contracts are based on 5,000 troy ounces and are priced in dollars per troy
ounce. Suppose a closing report displays these prices for a December contract: Open 17.435,
High 17.450, Low 17.025, and Settle 17.119. What is the closing value for two December futures
contracts on silver?
A) $174,350
B) $174,500
C) $170,250
D) $171,190
E) $172,770
58) Gold futures contracts are based on 100 troy ounces and are priced in dollars per troy ounce.
You own three November contracts. At the end of trading today, the market report reflected
these prices: Open 1293.00, High 1295.00, Low 1286.00, and Settle 1296.10. What is the value
of your contracts at the market close today?
A) $129,610
B) $259,000
C) $258,600
D) $388,830
E) $360,460
59) Ethanol futures contracts are based on 29,000 gallons and are priced in dollars per gallon.
Assume the end-of-day report on a contract show prices of: Open 2.220, High 2.231, Low 2.181,
and Settle 2.186. What is the maximum profit that an investor could have earned by buying and
selling one of these contracts on this day?
A) $1,131
B) $1,450
C) $942
D) $2,436
E) $986
60) Futures contracts on palladium are based on 50 troy ounces and are priced in dollars per troy
ounce. Assume today’s open price on one May contract was 758.90 and the settle price was
756.10. You own three May contracts which you purchased at a quote of 749.30. What is your
total profit or loss to date?
A) $1,020
B) −$1,545
C) −$420
D) −$1,020
E) $1,545
61) Futures contracts on gold are based on 100 troy ounces and priced in dollars per troy ounce.
Assume the January gold contract settled today at 1285.10 and opened at 1284.60. The April
contract settled at 1285.30 and opened at 1285. You own four of the April contracts that you
purchased at 1284.70. What is your total profit or loss to date?
A) $160
B) $240
C) $40
D) $120
E) $60
62) You decided to speculate in the market and sold six platinum futures contracts when the
futures price was $1,391.20 per troy ounce. The price on the contract maturity date was $1,395.
The contract size is 50 troy ounces. What was your total profit or loss on the settlement day if
you had to cover your position in the spot market?
A) $190
B) $1,140
C) −$190
D) $50
E) −$1,140
63) You expect to deliver 50,000 bushels of wheat to the market in July. Assume you hedged
your position by selling futures contracts on half of your expected delivery at a price of 443.25.
The futures contracts are based on 5,000 bushels and are priced in cents per bushel. Assume the
market price turns out to be 445.75 when you actually deliver the wheat. How much more or less
would you have earned if you had not bought the futures contracts?
A) $1,250 less
B) $625 less
C) $0
D) $625 more
E) $1,250 more
64) You need 70,000 bushels of corn for your production operations next month. The futures
contracts on corn are based on 5,000 bushels and are currently quoted at 371.25 cents per bushel
for delivery next month. If you want to hedge your cost, you should ________ contracts at a cost
of ________ per contract.
A) Buy 12; $2,570
B) Buy 14; $18,562.50
C) Buy 16; $22,570.00
D) Sell 14; $18,562.50
E) Sell 16; $22,570.00
65) Suppose that last month you purchased ten January crude oil futures contracts at a quoted
price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel.
Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by
hedging your position?
A) $23,200
B) $2,320
C) $0
D) −$2,320
E) −$23,200
66) You anticipate your firm will need 20,000 bushels of oats in December so you hedged your
position today at the closing price when the daily price quotes were: Open 222, High 225.50,
Low 223.50, and Settle 218.50. Assume the actual market quote turns out to be 228.70 on the
day you actually acquire the oats. Oats futures contracts are based on 5,000 bushels and priced in
cents per bushel. What was your gain or loss from hedging your position?
A) −$510
B) $2,040
C) $510
D) $1,060
E) −$2,040
67) Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa
futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your
profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?
A) $330
B) −$330
C) $110
D) −$110
E) $150
68) Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51
per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise
price of $51 per barrel. Her net payoff per barrel on these option contracts is ________ if the
market price per barrel is $49 and ________ if the price per barrel is $55.
A) −$4; $2
B) −$2; $0
C) $0; $2
D) $0; −$4
E) −$2; $4
69) Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price
of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same
exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________
if the market price per barrel is $43 and ________ if the price per barrel is $47.
A) −$2; $2
B) −$2; $0
C) $0; $2
D) $2; −$2
E) $2; $2