Question 1

Which of the following is NOT true?

Accepted Answer

A)   Black's model can be used to value an American-style option on futures
B)   Black's model can be used to value a European-style option on futures
C)   Black's model can be used to value a European-style option on spot
D)   Black's model is widely used by practitioners A

Question 2

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the value of a six-month put option with a strike price of 37 cents?

Accepted Answer

A)   3.00 cents
B)   2.91 cents
C)   1.16 cents
D)   1.20 cents C

Question 3

What is the cash component of the payoff if a call futures option on 50 units of the underlying asset is exercised?

Accepted Answer

A)   (Current Futures Price - Strike Price)  times 50
B)   (Strike Price - Current Futures Price)  times 50
C)   (Most Recent Futures Settlement Price - Strike Price)  times 50
D)   (Strike Price - Most Recent Futures Settlement Price)  times 50 C

Question 4

Which of the following is acquired (in addition to a cash payoff)when the holder of a call futures exercises?

Accepted Answer

A)   A long position in a futures contract
B)   A short position in a futures contract
C)   A long position in the underlying asset
D)   A short position in the underlying asset

Question 5

Which of the following describes a futures-style option?

Accepted Answer

A)   An option on a futures
B)   An option on spot with daily settlement
C)   A futures on an option payoff
D)   None of the above

Question 6

One-year European call and put options on an asset are worth $3 and $4 respectively when the strike price is $20 and the one-year risk-free rate is 5%.What is the one-year futures price of the asset if there are no arbitrage opportunities? (Use put-call parity.)

Accepted Answer

A)   $19.55
B)   $18.95
C)   $20.95
D)   $20.45

Question 7

What is the value of a European call futures option where the futures price is 50,the strike price is 50,the risk-free rate is 5%,the volatility is 20% and the time to maturity is three months?

Accepted Answer

A)   49.38N(0.05) -49.38N(-0.05) 
B)   50N(0.05) -50N(-0.05) 
C)   49.38N(0.1) -49.38N(-0.1) 
D)   50N(0.1) -49.38N(-0.1)

Question 8

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the value of a six month call option with a strike price of 39 cents?

Accepted Answer

A)   5.00 cents
B)   2.91 cents
C)   3.00 cents
D)   4.21 cents

Question 9

Which of the following is true when the futures price exceeds the spot price?

Accepted Answer

A)   Calls on futures should never be exercised early
B)   Put on futures should never be exercised early
C)   A call on futures is always worth at least as much as the corresponding call on spot
D)   A call on spot is always worth at least as much as the corresponding call on futures

Question 10

Which of the following is acquired (in addition to a cash payoff)when the holder of a put futures exercises?

Accepted Answer

A)   A long position in a futures contract
B)   A short position in a futures contract
C)   A long position in the underlying asset
D)   A short position in the underlying asset

Question 11

Which of the following is true for a September futures option?

Accepted Answer

A)   The expiration month of option is September
B)   The option was first traded in September
C)   The delivery month of the underlying futures contract is September
D)   September is the first month when the option can be exercised

Question 12

Which of the following is true?

Accepted Answer

A)   A stock option is settled daily
B)   A futures-style option is settled daily
C)   A foreign currency option is settled daily
D)   None of the above

Question 13

Which of the following are true?

Accepted Answer

A)   Futures options are usually European
B)   Futures options are usually American
C)   Both American and European futures options trade actively in exchanges
D)   Both American and European futures options trade actively in the OTC market

Question 14

What is the expected growth rate of an index futures price in the risk-neutral world?

Accepted Answer

A)   The excess of the risk-free rate over the dividend yield
B)   The risk-free rate
C)   The dividend yield on the index
D)   Zero

Question 15

What is the cash settlement if a put futures option on 50 units of the underlying asset is exercised?

Accepted Answer

A)   (Current Futures Price - Strike Price)  times 50
B)   (Strike Price - Current Futures Price)  times 50
C)   (Most Recent Futures Settlement Price - Strike Price)  times 50
D)   (Strike Price - Most Recent Futures Settlement Price)  times 50

Question 16

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the probability of an up movement in a risk-neutral world?

Accepted Answer

A)   0.4
B)   0.5
C)   0.72
D)   0.6

Question 17

The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%.Which of the following is correct when a futures option on the index is being valued?

Accepted Answer

A)   The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.
B)   The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.
C)   The futures price of the S&P 500 is treated like a stock paying a dividend yield of 3%.
D)   The futures price of the S&P 500 is treated like a non-dividend-paying stock.

Question 18

Which of the following is true about a futures option and a spot option on the same underlying asset when they have the same strike price? The expiration dates of the two options and the futures are all the same.

Accepted Answer

A)   A European call spot option and an American call futures option are equivalent
B)   An American call spot option and a European call futures option are equivalent
C)   A European put spot option and European put futures option are equivalent
D)   An American put spot option and American put futures option are equivalent

Question 19

Consider a European one-year call futures option and a European one-year put futures options when the futures price equals the strike price.Which of the following is true?

Accepted Answer

A)   The call futures option is worth more than the put futures option
B)   The put futures option is worth more than the call futures option
C)   The call futures option is sometimes worth more and sometimes worth less than the put futures option
D)   The call futures option is worth the same as the put futures option

Question 20

When Black's model used to value a European option on the spot price of an asset,which of the following is NOT true?

Accepted Answer

A)   It is necessary to know the futures or forward price for a contract maturing at the same time as the option
B)   It is not necessary to estimate income on the underlying asset
C)   It is not necessary to know the risk-free rate
D)   The underlying asset can be an investment or a consumption asset

Exam 18: Futures Options and Blacks Model