1.A major advantage of options over futures contracts for hedging purposes is:

(a)options are cheaper.

(b)options need not be exercised. 

(c)options are more liquid.

(d)options are not legally enforceable obligations.

2.In efficient financial markets, the expected cost of hedging with options:

(a)is the same as hedging with futures.

(b)is the same as hedging with forward contracts.

(c)is less than hedging with forward and futures contracts.

(d)is more than hedging with forward and futures contracts. 

3.Foreign-currency options are available:

(a)only in Chicago.

(b)only in the U.S.

(c)only outside of the U.S.

(d)in many countries. 

4.An expected receipt of German marks by an American exporter can be hedged best by:

(a)buying DM call options.

(b)buying DM put options. 

(c)selling DM put options.

(d)buying European DM call options.

5.Using foreign-currency futures options instead of underlying foreign-currency futures contracts:

(a)is a way to eliminate the basis risk associated with futures contracts.

(b)is a less expensive way of hedging than with futures contracts.

(c)is a less expensive way of hedging than with forward contracts.

(d)still leaves the hedger exposed to basis risk. 

6.The writers of currency call options:

(a)are legally obligated to sell the currency at the strike price if requested by the option holder. 

(b)can refuse to sell the currency to the option holder if the strike price is below the current spot price.

(c)can refuse to sell the currency to the option holder if the strike price is above the current spot price.

(d)receive no payment for writing the options.

7.To set a cap on the interest rate that a company must pay for a future loan, the treasurer can:

(a)buy interest-rate call options.

(b)buy interest-rate put options. 

(c)write interest-rate put options.

(d)write interest-rate call options.

8.The interest-rate cap that a corporate treasurer can set on a future loan is equal to the rate implied by the strike price of an interest-rate:

(a)put option plus the option premium. 

(b)put option less the option premium.

(c)call option plus the option premium.

(d)call option less the option premium.

9.The value of an interest-rate call option will increase if:

(a)interest rates fall. 

(b)interest rates rise.

(c)the maturity of the option is shortened.

(d)interest rates become less volatile.

10.The option delta is:

(a)the expected change in the option’s premium given a small change in the price of the underlying asset. 

(b)the expected change in the option’s premium given a small change in the maturity of the option.

(c)the expected change in the option’s premium given a small change in the risk-free interest rate.

(d)the expected change in the option’s premium given a small change in the option’s exercise price.