Test bank fundamentals of futures and options markets 7e by hull chapter 15

Test Bank: Chapter 15
Options on Stock Indices and Currencies

1. 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 the S&P 100 to provide protection against the portfolio falling below$9.5 million.
The S&P 100 index is currently standing at 500 and each contract is on 100 times the
index.
(i) If the portfolio has a beta of 1, how many put option contracts should be
purchased? _ _ _ _ _ _
(ii) If the portfolio has a beta of 1, what should the strike price of the put options
be? _ _ _ _ _ _
(iii)If the portfolio has a beta of 0.5, how many put options should be purchased?
______
(iv) If the portfolio has a beta of 0.5, what should the strike prices of the put
options be? Assume that the risk-free rate is 10% and the dividend yield on
both the portfolio and the index is 2%. _ _ _ _ _ _
2. To create a range forward contract in order to hedge foreign currency that will be
received a company should (Circle one)
(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. To create a range forward contract in order to hedge foreign currency that will be paid
a company should (Circle one)
(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
4. Consider a European put option on a 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. What is a lower bound to the option


price? (Give two decimal places.) _ _ _ _ _ _
5. Consider a European call option on a currency. The exchange rate is 1.0000, the strike
price is 0.9100, the time to maturity is one year, the domestic risk-free rate is 5% per
annum, and the foreign risk-free rate is 3% per annum. What is a lower bound to the
option price? (Give four decimal places.) _ _ _ _ _ _
6. Options on an exchange rate can be valued using the formula for an option of a stock
paying a continuous dividend yield where the dividend yield is replaced by (Circle
one)
(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
7. The put call parity formula for options on a currency is the same as that for options on
a non-dividend-paying stock except that
qT
(a) S0 is replaced by S0e
rT
(b) S0 is replaced by S0e
−qT

(c) S0 is replaced by S0e
−rT
(d) S0 is replaced by S0e