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Q:
The decision on how to divide funds across the major asset classes is referred to as:a. Dynamic hedging.b. Insuring the portfolio.c. Asset allocation decision.d. Program trading.e. None of the above.
Q:
An investment strategy that seeks to insure the value of a portfolio using a synthetic put option strategy is called:a. Riskless investing.b. Dynamic hedging.c. Program trading.d. Riskless arbitrage.e. None of the above.
Q:
Buying stock index futures, will:a. Increase a portfolio's beta.b. Decrease a portfolio's beta.c. Not affect a portfolio's beta.d. None of the above.
Q:
With stock index options, the hedger:a. Has downside risk protection.b. Locks in a price.c. Retains the upside potential, which is reduced by the option.d. a and c only.e. All of the above.
Q:
Which of the following statements is most correct?a. The stock index options market was initially inefficient.b. Arbitrage in the stock index options market is difficult.c. Since 1983, stock index futures are fairly priced.d. All of the above.e. None of the above.
Q:
Institutional investors employ index-related strategies in order to:a. Control market risk exposure.b. Construct an index fund.c. Enhance returns through index arbitrage.d. Implement an asset allocation decision.e. All of the above.
Q:
Stock index options can be used to:a. Protect a portfolio position against an adverse price movement.b. Bet on the movement of stock prices.c. Earn an abnormal return.d. a and b only.e. All of the above.
Q:
Which of the following statements is false?a. Stock index futures contracts are cash settlement contracts.b. There are margin requirements for futures contracts.c. Futures positions are marked-to-market daily.d. Margins for speculators are less than for hedgers.e. None of the above.
Q:
Options markets have developed in many countries, including:a. The United Kingdom.b. Canada.c. The Netherlands.d. All of the above.e. a and b only.
Q:
Which of the following statements is most correct?a. The development of the FLEX option is a response to the growing OTC market.b. There is an active secondary market for FLEX options.c. The FLEX option represents a link between listed options and OTC products.d. FLEX options can be created for Treasury securities.e. All of the above.
Q:
Explain the difference between naked strategies and covered (hedge) strategies.
Q:
Explain how a protective put buying strategy can protect the value of a stock in a portfolio against the risk of a decline in market value.
Q:
Compare and contrast a warrant and an exchange-traded call option.
Q:
To control portfolio risk, institutional investors us:a. Naked option strategies.b. Covered call writing.c. Protective put buying. d. All of the above.e. None of the above.
Q:
Which of the following is false?a. Warrants are attached to a bond or preferred stock.b. Warrants may be detached from the host security that they were attached to.c. Warrants can be traded separately on major national exchanges.d. Warrants have a value.e. None of the above.
Q:
Warrants differ from exchange-traded call options in that:a. Warrants have much shorter expiration dates.b. The issuer of the warrant is the company itself.c. The exercise of warrants results in a dilution of earnings.d. b and c only.e. All of the above.
Q:
A warrant, which gives the holder the right but not the obligation to buy a designated number of shares at a specified price before a set date, is equivalent to:a. A call option.b. A put option.c. A straddle.d. A spread.e. None of the above.
Q:
Strategies that combine two or more options on the same underlying stock, include:a. Vertical spreads.b. Butterfly spreads.c. Diagonal spreads.d. Straddles.e. All of the above.
Q:
To protect the value of a stock held in a portfolio against the risk of a decline in the market value, an investor would follow:a. A covered call writing strategy. b. A protective put buying strategy.c. A butterfly spread.d. A short call strategy.e. None of the above.
Q:
A covered or hedge strategy involves:a. A position in an option.b. Funds invested in a riskfree security.c. A position in the underlying stock.d. a and c only.e. All of the above.
Q:
If an investor wants to purchase a stock at a price less than the prevailing market price:a. Place a limit order.b. Write a put option with a strike price near the desired price.c. Sell a call option.d. a and b only.e. None of the above.
Q:
A long/call paper buying strategy involves:a. Purchasing a call option.b. Investing in a riskfree security.c. Buying a put option.d. a and b only.e. None of the above.
Q:
The most straightforward option strategy for benefiting from an expected decrease in the price of some common stock while avoiding the unfavorable consequences should the price rise is to follow a:a. Long put strategy.b. Short put strategy.c. Long call strategy.d. Short call strategy.e. None of the above.
Q:
To take advantage of an anticipated increase in the stock price while, at the same time, limiting the maximum loss to the option, the investor will use a:a. Short call strategy.b. Long call strategy.c. Cash-secured put writing strategy.d. Long-call paper buying strategy.e. None of the above.
Q:
Option strategies that do not involve an offsetting or risk-reducing position in either another option or the underlying common stock is called:a. Naked strategies.b. Covered strategies.c. Hedge strategies.d. Active strategies.e. Passive strategies.
Q:
The Black-Scholes model is based on several restrictive assumptions, including:a. Constant variance of the stock price.b. Stock prices are continuous and smooth.c. Zero taxes and transactions costs.d. Equal borrowing and lending rates. e. All of the above.*
Q:
Hedging with options by taking a position in the underlying stock allows the investor to lock in:a. The riskless arbitrage profit.b. The abnormal return.c. The riskfree rate.d. Price risk.e. None of the above.
Q:
Of the five factors that influence the price of an option:a. The strike price must be estimated.b. The stock price is observed.c. The standard deviation must be estimated.d. b and c only.e. All of the above.
Q:
If the price of a call option in the market is higher than that derived from the Black-Scholes option pricing model, an investor could:a. Sell the call option and buy a certain number of shares in the underlying stock.b. Buy the call option and buy a certain number of shares in the underlying stock.c. Buy the call option and sell short a certain number of shares in the underlying stock.d. Sell the call option and sell short a certain number of shares in the underlying stocke. None of the above.
Q:
The Black-Scholes option pricing model:a. Computes a fair option price.b. Derives the price for a European call option.c. Prices options written on a nondividend-paying stock.d. b and c only.e. All of the above.
Q:
LEAPS are:a. Short-term options.b. Long-term options.c. Nearby options.d. Perpetual options.e. None of the above.
Q:
Which of the following statement is most correct?a. Exchange-traded stock options are for one unit of the designated common stock.b. Options have standardized expiration dates.c. The longest time for an option on a stock is six months.d. b and c only.e. All of the above.
Q:
In the U.S., options are traded on the:a. Philadelphia Stock Exchange.b. CBOE.c. American Stock Exchange.d. NYSE.e. All of the above.
Q:
The prices of stock on markets around the world do not move together in an exact way because the economic systems in which those markets are located have dissimilar economic, social and political environments. Explain the effects of these environmental factors on stock prices.
Q:
Discuss the reasons for why the stock market in the U.S. has undergone significant structural changes.
Q:
Distinguish between block trades and program trades.
Q:
Which of the following is not a market index?a. DAX.b. FTSE 100.c. EAFE.d. CAC 40. e. All of the above are stock market indexes.
Q:
The Nikkei 225 Stock Average and the TOPIX are the indexes for the stocks of established and large companies traded on the:a. Frankfurt Stock Exchange.b. London Stock Exchange.c. Tokyo Stock Exchange.d. Toronto Stock Exchange.e. Paris Bourse.
Q:
The construction of stock market indicators differs on the basis of:a. The relative weights assigned to the stocks included in the index.b. The method of averaging used across all the stocks.c. The universe of stocks represented by the sample underlying the index.d. All of the above.e. A and b only.
Q:
Which of the following statements is most correct?a. The largest single-day decline in the history of the U.S. stock market occurred in October 1987.b. Rule 80A and 80B are examples of price limits.c. The S&P 500 is the most comprehensive stock index.d. a and b only.e. All of the above.
Q:
The major applications of program trades are:a. Asset allocation.b. Index arbitrage.c. Indexing.d. All of the above.e. None of the above.
Q:
The execution of trades in a large number of different stocks at or near the same time as possible is called:a. Block trades.b. Program trades.c. Basket trades.d. b and c only.e. All of the above.
Q:
The term upstairs markets refers to:a. The markets located on the top floor of the NYSE.b. A network of trading desks of the major securities firms and other institutional investors that communicate electronically with each other.c. The market for trading listed stocks in the OTC market.d. The market for trading stocks not listed on a major stock exchange.e. None of the above.
Q:
Which of the following is most correct?a. Stock trading by individuals has increased significantly during the last decade.b. Stock trading commissions have increased both for institutions and individuals.c. Discount brokers and online brokers offer less service to retail investors and consequently stock trading commissions have decreased significantly.d. Because individuals usually transact smaller orders, they will incur higher impact costs.e. None of the above.
Q:
Trading differences exist between retail investors and institutional investors based on:a. Size of trade.b. Commission.c. Method of order execution.d. All of the above.e. a and b only.
Q:
Impact costs, timing costs, and opportunity costs are examples of:a. Explicit costs.b. Implicit costs.c. Soft dollars.d. Hard dollars.e. None of the above.
Q:
Trading costs can be decomposed into:a. Explicit costs.b. Implicit costs.c. Soft dollars.d. a and b only.*e. All of the above.
Q:
Margin calls must be satisfied:a. In cash.b. With additional stocks as collateral.c. With an extension of the credit limit.d. With commodities.e. None of the above.
Q:
The initial margin requirement is set by:a. The broker.b. The NASD.c. The Federal Reserve.d. The Commodity Futures Trading Commission.e. None of the above.
Q:
A transaction in which an investor borrows to buy shares using the shares themselves as collateral is called:a. Short selling. b. Buying on margin.c. Going long.d. Going short.e. None of the above.
Q:
Exchanges impose restrictions as to when a short sale may be executed, which is referred to as:a. Trading halts.b. Circuit breakers.c. Tick-test rules.d. Price limits.e. None of the above.
Q:
A block trade is defined by the NYSE as an order of:a. 10,000 shares of a given stock.b. Less than a round lot.c. Shares with a total market value of $200,000 or more.d. a and c only.e. All of the above.
Q:
An odd lot is defined as:a. 100 shares of stock.b. Less than a round lot.c. A block trade.d. Less than 100 shares of stock.e. b and d only.
Q:
A stop order that designates a price limit is called:a. Stop order.b. Limit order.c. Stop-limit order.d. Market order.e. Fill order.
Q:
Examples of conditional orders include:a. Limit order.b. Stop order.c. Market order.d. a and b only.e. All of the above.
Q:
The most common type of order submitted to the stock market is the:a. Market order.b. Stop order.c. Limit order.d. Conditional order.e. None of the above.
Q:
Discuss the basic characteristics of the exchanges in the U.K. and Germany.
Q:
Differentiate between the four types of markets where stocks are traded in the U.S.
Q:
Compare and contrast the structure of the NYSE and the NASDAQ.
Q:
On the Tokyo Stock Exchange, a satori:a. Functions as an intermediary between the dealers and the brokers who are members of the exchange.b. Cannot buy or sell for their own accounts.c. Arrange transactions among dealers.d. Conduct auctions during the trading day.e. All of the above.
Q:
Most stock markets around the world use:a. The specialist system.b. Some version of competitive dealer system.c. An electronically assisted market maker system. d. b and c only.e. All of the above.
Q:
Prior to February 2001, the Chinese stock market was divided into:a. A shares.b. B shares.c. H shares.d. a and b only.e. All of the above.
Q:
A stock issue, which is offered simultaneously in several countries by an international syndicate is called a(n):a. International equity.b. Foreign equity. c. Euroequity.d. ADR.e. GDR.
Q:
The goals of the Big Bang reforms for the Japanese financial markets were to develop a:a. Free market, which employs market principles.b. Fair and transparent market.c. Global market.d. A market, which is less susceptible to domestic political pressures.e. All of the above.
Q:
In Germany, the shares of smaller growth companies are traded:a. In the official market.b. In the regulated market. c. In the Neuer Market.d. a and b only.e. None of the above.
Q:
The financial reform, which occurred in England in 1986, is called:a. The Big Board.b. The Big Bang.c. Decimal Monday.d. The Black Monday.e. None of the above.
Q:
When a U.S. corporation's equities are traded in a foreign market, they are typically issued in the form of:a. A Global Depository Receipt.b. An American Depository Receipt.c. A Depository Receipt.d. A foreign share.e. None of the above.
Q:
Firms seek to list their shares on the exchanges of several countries because:a. They seek to diversify their sources of capital across national boundaries.b. It diminishes the prospect of takeover by other domestic concerns.c. It boosts their name awareness.d. It helps increase their sales revenues.e. All of the above.
Q:
Which of the following is false with respect to the regulatory changes in trading?a. The SEC cost study in 2001 indicated that for many types of orders, investors get worse prices when they trade on the NASDAQ than on the NYSE.b. Stocks are now traded with a spread of 1/16.c. Regulation FD requires that information be made available to all investors at the same time.d. Decimalization was adopted in 2001 with minimum price changes of one cent.e. Cost differences exist because of structural differences between the NYSE and NASDAQ.
Q:
On June 5, 1997, the NYSE voted to adopt a system of trading in:a. Sixteenth.b. Decimals.c. Percent.d. Pennies.e. Tennies.
Q:
An important structural difference between exchanges and the OTC market with respect to the activities of dealers is that:a. On exchanges, there is only one market maker or dealer per stock called the specialist.b. In the OTC market, there may be many dealers for a stock depending on the trading volume.c. There is not competition among specialists.d. a and b only.e. All of the above.
Q:
Which of the following statements is most correct?a. The NYSE is called a membership organization.b. NYSE's owners are its seat holders.c. NASDAQ is owned by the NASD.d. NASDAQ is a for-profit organization.e. All of the above.
Q:
The largest membership category on the NYSE is that of:a. A specialist.b. Commission broker.c. Independent floor broker.d. Registered trader.e. Local.
Q:
The Third Market is the market for:a. Trading in the OTC market of stocks not listed on an exchange.b. Trading in the OTC market of stocks listed on an exchange.c. Trading on exchanges of stock listed on an exchange.d. Private transactions between institutional investors without an intermediary.e. None of the above.
Q:
Private transactions between institutional investors who deal directly with each other without an intermediary take place in the:a. First Market.b. Second Market.c. Third Market.d. Fourth Market.e. None of the above.
Q:
The "Big Board" is the name commonly used for:a. The American Stock Exchange.b. The Philadelphia Stock Exchange.c. The New York Stock Exchange.d. The London Stock Exchange.e. None of the above.
Q:
Secondary market trading in common stocks occurs:a. On organized exchanges, such as the NYSE.b. In the over-the-counter market, such as NASDAQ.c. In the call market.d. a and b only.e. All of the above.
Q:
The secondary market for common stock has undergone significant changes since the 1960s as a result of:a. The institutionalization of the stock market.b. Changes in government regulation of the market.c. Advances in computer technology.d. A and b only.e. All of the above.
Q:
Common stock represents:a. Ownership interest in a corporation.b. A liability.c. Program trading.d. Arbitrage.e. None of the above.
Q:
Explain the relationship between a cap and a floor and an option.