Derivatives Test Bank
Dr. J. A. Schnabel
Page 1 of 36
Explanation of numbering system: The first one or two digits before the period refer to
the textbook chapter to which the question pertains. The digits after the period refer to
the number of the Test

CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is always

Lets say P = 1: What is the arbitrage opportunity:
c Xe rT p So
3 30e 0.1*3/12 1 31
$32.26 $32.00
LHS>RHS Arbitrage opportunity is possible:
Buy low and sell high:
-Short call
-Buy stock
-Buy put
31+1-3=$29 (we can borrow 29 for three months)
If the inves

Interest Rate Futures
Chapter 6
Fundamentals of Futures and Options Markets, 8th Ed, Ch 6, 1
Copyright
John C. Hull 2013
Day Count Convention
l Defines:
the period of time to which the interest rate
applies
l The period of time used to calculate accrued

Determination of Forward
and Futures Prices
Chapter 5
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, 1
Copyright
John C. Hull 2013
Consumption vs Investment Assets
l Investment
assets are assets held by
significant numbers of people purely fo

Hedging Strategies Using
Futures
Chapter 3
1
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright
John C. Hull 2013
Long & Short Hedges
lA
long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to

Interest Rates
Chapter 4
Fundamentals of Futures and Options Markets, 8th Ed, Ch 4, 1
Copyright
John C. Hull 2013
Types of Rates
l Treasury
rates
l LIBOR rates
l Repo rates
Fundamentals of Futures and Options Markets, 8th Ed, Ch 4, Copyright
2
John C. H

Introduction
Chapter 1
Fundamentals of Futures and Options Markets, 8th Ed, Ch 1, 1
Copyright
John C. Hull 2013
The Nature of Derivatives
A derivative is an instrument whose
value depends on the values of other more
basic underlying variables
Fundamental

Mechanics of Futures Markets
Chapter 2
Fundamentals of Futures and Options Markets, 8th Ed, Ch 2, 1
Copyright
John C. Hull 2013
Futures Contracts
l Available
on a wide range of underlyings
l Exchange traded
l Specifications need to be defined:
What can b

Chapter 12: Slide 9
Find P:
Cost of setting up the portfolio today:
S f
Where f =
f S ( Su fu )e
rT
S f ( Su fu )e rT
f S ( Su fu )e rT
S Su e rT fue rT
S (1 ue rT ) fue rT
Substitute
fu f d
Su Sd
back in previous equation:
fu f d
(1 ue rT ) fue rT
Su

Binomial Trees in Practice
Chapter 18
1
Fundamentals of Futures and Options Markets, 8th Ed, Ch 18, Copyright
John C. Hull 2013
Binomial Trees
Binomial trees are frequently used to
approximate the movements in the price of
a stock or other asset
l In eac

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Valuing Stock Options:
The Black-Scholes-Merton
Model
Chapter 13
1
Fundamentals of Futures and Options Markets, 8th Ed, Ch 13, Copyright
John C. Hull 2013
The Black-Scholes-Merton
Random Walk Assumption
l Consider
a stock whose price is S
l In a short pe

Futures Options
Chapter 16
1
Fundamentals of Futures and Options Markets, 8th Ed, Ch 16, Copyright
John C. Hull 2013
Options on Futures
l Referred
to by the maturity month of the
underlying futures
l The option is American and usually
expires on or a few

CHAPTER 1
Introduction
N otes for the Instructor
This chapter intrduces the markets for futures , forward , and options contracts and
explains the activities of hedgers , speculators , and arbitrageurs. Issues concerning futures
contracts such as margin r

CHAPTER 8
Mechanics of Options Markets
N otes for the Instructor
This chapter provides information on how options markets work. 1 usually go through
the chapter fairly quickly leaving students to read the details for themselves. Points 1
spend time on are

Mechanics of Options Markets
Chapter 9
Fundamentals of Futures and Options Markets, 8th Ed, Ch 9, 1
Copyright
John C. Hull 2013
Types of Options
lA
call is an option to buy
l A put is an option to sell
l A European option can be exercised only
at the end

CHAPTER 17
The Greek Letters
Practice Questions
Problem 17.8.
What does it mean to assert that the theta of an option position is 0.1 when time is measured
in years? If a trader feels that neither a stock price nor its implied volatility will change,
what

Tutorial 2
Textbook: Fundamentals of Futures and Options Markets by John C. Hull. Pearson new
International Edition. Ed 8. ISBN number: 978-1-29204-190-2
Note: Questions with * must be covered in tutorial class
Problem 4.11.*
Suppose that 6-month, 12-mont

CHAPTER 1
Introduction
Practice Questions
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
months?
You should buy

CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.8.
The party with a short position in a futures contract sometimes has options as to the precise
asset that will be delivered, where delivery will take place, when delivery will take plac

CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.8.
In the Chicago Board of Trades corn futures contract, the following delivery months are
available: March, May, July, September, and December. State the contract that should be
used

CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day
period?
The cash

CHAPTER 4
Interest Rates
Practice Questions
Problem 4.8.
The cash prices of six-month and one-year Treasury bills are 94.0 and 89.0. A 1.5-year bond
that will pay coupons of $4 every six months currently sells for $94.84. A two-year bond that
will pay cou

CHAPTER 7
Swaps
Practice Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it
is likely that

CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.8.
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
market for

CHAPTER 10
Properties of Stock Options
Practice Questions
Problem 10.8.
Explain why the arguments leading to putcall parity for European options cannot be used to
give a similar result for American options.
When early exercise is not possible, we can argu

CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.8.
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using