Forward and Option Contracts Quiz

A one-year forward contract is an agreement where

• One side has the right to buy an asset for a certain price in one year’s time.

• One side has the obligation to buy an asset for a certain price in one year’s time.

• One side has the obligation to buy an asset for a certain price at some time during the next year.

• One side has the obligation to buy an asset for the market price in one year’s time.

Which of the following is NOT true

• When a CBOE call option on IBM is exercised, IBM issues more stock

• An American option can be exercised at any time during its life

• An call option will always be exercised at maturity if the underlying asset price is greater than the strike price

• A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is

• $35

• $40

• $30

• $36

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is

• $25

• $28

• $26

• $20

Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets

• The exchange-traded market is twice as big as the over-the-counter market.

• The over-the-counter market is twice as big as the exchange-traded market.

• The exchange-traded market is ten times as big as the over-the-counter market.

• The over-the-counter market is ten times as big as the exchange-traded market.

Which of the following best describes the term “spot price”

• The price for immediate delivery

• The price for delivery at a future time

• The price of an asset that has been damaged

• The price of renting an asset

Which of the following is true about a long forward contract

• The contract becomes more valuable as the price of the asset declines

• The contract becomes more valuable as the price of the asset rises

• The contract is worth zero if the price of the asset declines after the contract has been entered into

• The contract is worth zero if the price of the asset rises after the contract has been entered into

An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true

• The investor has made a gain of $4,000

• The investor has made a loss of $4,000

• The investor has made a gain of $2,000

• The investor has made a loss of $2,000

Which of the following describes European options?

• Sold in Europe

• Priced in Euros

• Exercisable only at maturity

• Calls (there are no European puts)

Which of the following is NOT true

• A call option gives the holder the right to buy an asset by a certain date for a certain price

• A put option gives the holder the right to sell an asset by a certain date for a certain price

• The holder of a call or put option must exercise the right to sell or buy an asset

• The holder of a forward contract is obligated to buy or sell an asset