Reading 64: LOS j ～ Q1- 4 following, statements, black, style

spaceedu

1.Which of the following statements is most accurate?

A)   European options on futures are more valuable than comparable American options on futures.

B)   European options on forwards are more valuable than comparable American options on forwards.

C)   American options on forwards are more valuable than comparable European options on forwards.

D)   American options on futures are more valuable than comparable European options on futures.

2.Regarding deep in-the-money options on forwards, it is:

A)   never worthwhile to exercise puts or calls early.

B)   sometimes worthwhile to exercise calls early but not puts.

C)   sometimes worthwhile to exercise puts early but not calls.

D)   sometimes worthwhile to exercise both calls and puts early.

3.Regarding deep in-the-money options on futures, it is:

A)   sometimes worthwhile to exercise calls early but not puts.

B)   sometimes worthwhile to exercise puts early but not calls.

C)   sometimes worthwhile to exercise both calls and puts early.

D)   never worthwhile to exercise puts or calls early.

4.Early exercise of in-the-money American options on:

A)   forwards is sometimes worthwhile but never is for options on futures.

B)   futures is sometimes worthwhile but never is for options on forwards.

C)   both futures and forwards is sometimes worthwhile.

D)   futures and forwards is never worthwhile.

spaceedu

1.Which of the following statements is most accurate?

A)   European options on futures are more valuable than comparable American options on futures.

B)   European options on forwards are more valuable than comparable American options on forwards.

C)   American options on forwards are more valuable than comparable European options on forwards.

D)   American options on futures are more valuable than comparable European options on futures.

The correct answer was D)

Because of the mark-to-market feature of futures contracts, American options on futures are more valuable than comparable European options. The value of American and European options on forwards are the same.

2.Regarding deep in-the-money options on forwards, it is:

A)   never worthwhile to exercise puts or calls early.

B)   sometimes worthwhile to exercise calls early but not puts.

C)   sometimes worthwhile to exercise puts early but not calls.

D)   sometimes worthwhile to exercise both calls and puts early.

The correct answer was A)

Unlike futures, forwards do not generate any cash at exercise even when they are deep in-the-money so there is no advantage to early exercise.

3.Regarding deep in-the-money options on futures, it is:

A)   sometimes worthwhile to exercise calls early but not puts.

B)   sometimes worthwhile to exercise puts early but not calls.

C)   sometimes worthwhile to exercise both calls and puts early.

D)   never worthwhile to exercise puts or calls early.

The correct answer was C)     

If puts or calls on futures are significantly in-the-money it may be worthwhile to exercise them early to generate the cash from the immediate mark to market of the futures contract when the option is exercised.

4.Early exercise of in-the-money American options on:

A)   forwards is sometimes worthwhile but never is for options on futures.

B)   futures is sometimes worthwhile but never is for options on forwards.

C)   both futures and forwards is sometimes worthwhile.

D)   futures and forwards is never worthwhile.

The correct answer was B)

Early exercise of in-the-money American options on futures is sometimes worthwhile because the immediate mark to market upon exercise will generate funds that can earn interest. It is never worthwhile for options on forwards because no funds are generated until the settlement date of the forward contract.