Fundamentals of Futures And Options Markets 9th Edition By John C. Hull – Test Bank

Complete Test Bank With Answers

Sample Questions Posted Below

Hull: Fundamentals of Futures and Options Markets, Ninth Edition

Chapter 5: Determination of Forward and Futures Prices

Multiple Choice Test Bank

Which of the following is a consumption asset?

The S&P 500 index

The Canadian dollar

Copper 

IBM stock

Answer: C

An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain? 
A.  $1,000

B.  $400

C.  $700

D.  $300

Answer: B

The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price?  

A.  $40.50

B.  $22.22

C.  $33.00

D. $33.16

Answer:  A

The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price?

  A.  $19.67

B.  $35.84

C.  $45.15

D.  $40.50

Answer: B

An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?

A. 0.7070

B. 0.7177

C. 0.7249

D. 0.6930

Answer: D

Which of the following is true?  

The convenience yield is always positive or zero. 

The convenience yield is always positive for an investment asset. 

The convenience yield is always negative for a consumption asset. 

The convenience yield measures the average return earned by holding futures contracts. 

Answer: A

A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract?

A.  +$2.00

B.  −$2.00

C.  +$1.96

D. −$1.96

Answer: D

The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true? 

The forward price equals the expected future spot price. 

The forward price is greater than the expected future spot price. 

The forward price is less than the expected future spot price. 

The forward price is sometimes greater and sometimes less than the expected future spot price.

Answer:  C 

Which of the following describes the way the futures price of a foreign currency is quoted?

The  number of U.S. dollars per unit of the foreign currency

The number of the foreign currency per U.S. dollar

Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round

There are no quotation conventions for futures prices

Answer:  A

Which of the following describes the way the forward price of a foreign currency is quoted?

The  number of U.S. dollars per unit of the foreign currency

The number of the foreign currency per U.S. dollar

Some forward prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round

There are no quotation conventions for forward prices

Answer:  C

Which of the following is NOT a reason why a short position in a stock is closed out?

The investor with the short position chooses to close out the position

The lender of the shares issues instructions to close out the position

The broker is no longer able to borrow shares from other clients

The investor does not maintain margins required on his/her margin account 

Answer: B

Which of the following is NOT true?

Gold and silver are investment assets

Investment assets are held by significant numbers of investors for investment purposes

Investment assets are never held for consumption

The forward price of an investment asset can be obtained from the spot price, interest rates and the income paid on the asset

Answer: C

What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.

The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.

The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.

The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year  

The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year  

Answer: D

Which of the following is NOT true about forward and futures contracts?

Forward contracts are more liquid than futures contracts

The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market

In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates 

Taxes and transaction costs can lead to forward and futures prices being different

Answer: A

As the convenience yield increases, which of the following is true?

The one-year futures price as a percentage of the spot price increases

The one-year futures price as a percentage of the spot price decreases

The one-year futures price as a percentage of the spot price stays the same

Any of the above can happen

Answer: B

 As inventories of a commodity decline, which of the following is true? 

The one-year futures price as a percentage of the spot price increases

The one-year futures price as a percentage of the spot price decreases

The one-year futures price as a percentage of the spot price stays the same

Any of the above can happen

Answer: B

Which of the following describes a known dividend yield on a stock?

The size of the dividend payments each year is known

Dividends per year as a percentage of today’s stock price are known

Dividends per year as a percentage of the stock price at the time when dividends are paid are known  

Dividends will yield a certain return to a person buying the stock today

Answer: C

Which of the following is an argument used by Keynes and Hicks?

If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than expected future spot prices

If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than expected future spot prices

If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than today’s spot prices

If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than today’s spot prices

Answer: A

Which of the following describes contango? 

The futures price is below the expected future spot price

The futures price is below today’s spot price

The futures price is a declining function of  the time to maturity

The futures price is above the expected future spot price 

Answer: D

Which of the following is true for a consumption commodity?

There is no limit to how high or low the futures price can be, except that the futures price cannot be negative

There is a lower limit to the futures price but no upper limit

There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative

The futures price can be determined with reasonable accuracy from the spot price and interest rates 

Answer: C