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Hull: Options, Futures, and Other Derivatives, Ninth Edition

Chapter 26: Exotic Options


Multiple Choice Test Bank: Questions

1. An Asian option is a term used to describe which of the following


A. An option where the payoff depends on whether a barrier is hit
B. An option where the payoff depends on the average value of a variable
over a period of time
C. An option that trades on an exchange in the Far East
D. Any option with a nonstandard payoff
2. As the barrier is observed more frequently, which of the following is true for a
knock-out option?
A. It becomes more valuable
B. It becomes less valuable
C. There is no effect on value
D. It may become more valuable or less valuable
3. There are two types of regular options (calls and puts). How many types of
compound options are there?
A. Two
B. Four
C. Six
D. Eight
4. There are two types of regular options (calls and puts). How many types of
barrier options are there?
A. Two
B. Four
C. Six
D. Eight
5. In a shout call option the strike price is $30. The holder shouts when the
asset price is $40. What is the payoff from the option if the final asset price is
$35?
A. $0
B. $5
C. $10
D. $15
6. A floating lookback call option pays off which of the following
A. The amount by which the final stock price exceeds the minimum stock
price
B. The amount by which the maximum stock price exceeds the final stock
price
C. The amount by which the strike price exceeds the minimum stock price
D. The amount by which the maximum stock price exceeds the strike
price

7. A fixed lookback put option pays off which of the following


A. The amount by which the final stock price exceeds the minimum stock
price
B. The amount by which the maximum stock price exceeds the final stock
price
C. The amount by which the strike price exceeds the minimum stock price
D. The amount by which the maximum stock price exceeds the strike
price
8. Which of the following is equivalent to a long position in a European call
option?
A. A short position in a cash-or-nothing put option plus a long position in
an asset-or-nothing put option
B. A long position in an asset-or-nothing put option plus a long position in
a cash-or-nothing put option
C. A long position in an asset-or-nothing call option plus a long position in
a cash-or-nothing call option
D. A long position in an asset-or-nothing call option plus a short position in
a cash-or-nothing call option
9. Which of the following is equivalent to a short position in a European put
option?
A. A short position in a cash-or-nothing put option plus a long position in
an asset-or-nothing put option
B. A long position in an asset-or-nothing put option plus a long position in
a cash-or-nothing put option
C. A long position in an asset-or-nothing call option plus a long position in
a cash-or-nothing call option
D. A long position in an asset-or-nothing call option plus a short position in
a cash-or-nothing call option
10.Which of the following describes a cliquet option
A. An option to exchange one asset for another
B. An instrument when the holder can choose between several alternative
options
C. An option on an option with predetermined strike prices for the two
options
D. A series of options with rules for determining strike prices
11.An employer has promised that it will grant employees three year options in
one years time and that the options will be at the money at the time they are
granted. What describes these options?
A. Chooser options
B. Forward start options
C. Compound options
D. Shout options

12.When
A.
B.
C.
D.

can Bermudan options be exercised?


Any time during the life of the options
Any time after a certain date up to the end of the life of the life
Any time before a certain date or at the end of the options life
On dates specified at the start of the option

13.Which of the following is the payoff from an average strike call option?
A. The excess of the strike price over the average stock price, if positive
B. The excess of the final stock price over the average stock price, if
positive
C. The excess of the average stock price over the strike price, if positive
D. The excess of the average stock price over the final stock price, if
positive
14.Which of the following is the payoff from an average strike put option?
A. The excess of the strike price over the average stock price, if positive
B. The excess of the final stock price over the average stock price, if
positive
C. The excess of the average stock price over the strike price, if positive
D. The excess of the average stock price over the final stock price, if
positive
15.A binary option pays of $100 if a non-dividend-paying stock price is greater
than its current value in three months. The risk-free rate is 3% and the
volatility is 40%. Which of the following is its value?
A. 99.25N(-0.1375)
B. 99.25N(0.1375)
C. 99.25N(-0.0625)
D. 99.25N(0.0625)
16.A volatility swap is
A. An instrument that swaps the change in the value of a market variable
for a fixed amount
B. A swap involving an asset whose volatility is greater than a certain
level
C. An exchange of the implied volatility of an option at a future time for a
fixed volatility
D. An exchange of the realized volatility of an asset for a fixed volatility
17.Which of the following is true of a gap option
A. The strike price determining whether a payoff is made is not the same
as the strike price determining the size of the payoff
B. There is a straightforward valuation formula similar to Black-ScholesMerton
C. It describes an option where there is a cost to exercising
D. All of the above
18.Which of the following is true

A. A variance swap is worth the square of a volatility swap


B. The payments on a variance swap are the square of the payments on a
volatility swap
C. Variance swaps can be valued in terms of European call and put
options.
D. None of the above
19.Static options replication for a portfolio of American options on a stock
involves
A. Finding a hedge portfolio to match daily changes
B. Finding a hedge portfolio to match values on a boundary that is certain
to be reached
C. Finding a hedge portfolio to match values at one particular time
D. Constructing a hedge taking both gamma and delta into account
20.Exotic options
A. Can always be hedged just as easily as regular options
B. Are easier to hedge than regular options
C. Are more difficult to hedge than regular options
D. Are sometimes easier and sometimes more difficult to hedge than
regular options.