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Investments & Securities
Q:
Are futures - commodity, interest-rate, stock-index, or currency - appropriate for
most individual investors?
Q:
What economic functions are fulfilled by futures?
Q:
What is the focus of speculators who spread stock-index futures?
Q:
What is meant by the term "marked to the market"?
Q:
What is the difference between hedgers and speculators in the futures markets?
Q:
What are the methods of settling a futures contract?
Q:
Briefly discuss the concept of margin in futures trading.
Q:
Compare the obligation entered into in a futures contract to the obligation in an options contract.
Q:
Explain a long position and a short position in futures trading.
Q:
What is the role of the clearinghouse in futures trading?
Q:
Explain the difference between a forward contract and a futures contract.
Q:
Basis = a. cash price b. futures price c. cash price + futures price d. cash price - futures price
Q:
An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as:
a. index programming.
b. arbitrage speculation.
c. index arbitrage.
d. program speculation.
Q:
If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by
a. short selling stock-index futures contracts.
b. hedging current short positions.
c. using stock-index futures to straddle the market.
d. buying stock-index futures contracts.
Q:
Stock-index futures can be used to hedge against which of the following types of risks?
a. Diversifiable risk
b. Systematic risk
c. Unsystematic risk
d. Company specific risk
Q:
An investor who sells a Treasury bond futures contract is expecting to profit from
a. an increase in the price of the treasury bond.
b. an increase in the underlying level of interest rates.
c. interest rates remaining unchanged.
d. a decrease in the underlying level of interest rates.
Q:
Select the CORRECT statement regarding basis risk associated with futures.
a. Basis risk can be completely eliminated.
b. Although the basis fluctuates over time, it can be precisely predicted.
c. The basis must be zero on the maturity date of the contract.
d. A hedge will reduce risk as long as basis fluctuations are positive.
Q:
Interest rate futures are not currently available on which of the following securities?
a. Corporate bonds
b. Treasury notes
c. one-month LIBOR rate
d. Treasury bonds
Q:
Which of the following is NOT a potential advantage of speculating in futures?
a. Leverage
b. Ease of transacting
c. Low transactions costs
d. High and narrow probability distribution of expected returns
Q:
One difference between a hedger and a speculator is that the hedger
a. may have either a profit or a loss.
b. may not close out his position by taking an opposite position.
c. does not have to put up margin.
d. faces a risk without the futures contract.
Q:
Speculators in the futures markets
a. make the market more volatile.
b. contribute liquidity to the market.
c. engage mainly in short sales.
d. serve no real economic function.
Q:
The difference between the cash price and the futures price on the same asset or commodity is known as the
a. basis.
b. spread.
c. yield spread.
d. premium.
Q:
An investor with a bond portfolio wishes to protect the value of his position by using futures contracts. This investor should use a
a. long hedge.
b. short hedge.
c. time spread.
d. money spread.
Q:
To protect the value of a bond portfolio against a rise in interest rates using futures, the portfolio owner could execute a ____________ hedge.
a. long
b. duration
c. short
d. maturity
Q:
The cumulative number of futures contracts that are not offset at any point in time is called:a. margin.b. open interest.c. hedged position.d. marked to the market position.
Q:
How often are futures contracts marked to market?
a. daily
b. weekly
c. monthly
d. quarterly
Q:
Of the following statements about futures trading, which one is INCORRECT?
a. There are no specialists on futures exchanges.
b. All futures contracts are eligible for margin trading.
c. Trading is halted for the day if the prices reach the daily limit.
d. The uptick rule applies to the shorting of futures contracts.
Q:
The initial margin required for futures trading
a. is only put up by the seller.
b. is only put up by the buyer.
c. can be put up by either party, whoever initiates the transaction.
d. must be put up by both the buyer and the seller.
Q:
Which of the following is a characteristic of futures contracts? They
a. are marked to the market daily.
b. can be sold short only on an uptick.
c. are handled by specialists on futures exchanges.
d. have no daily price limits.
Q:
When trading futures, margin
a. is seldom used.
b. indicates that credit is being extended.
c. is a down payment.
d. in effect, is a performance bond.
Q:
Approximately what percentage of futures contracts is closed by offset before the contract expires:
a. 25
b. 50
c. 95
d. 75
Q:
In the case of a futures contract, buyers can settle a contract
a. only by taking delivery.
b. only by arranging an offsetting contract.
c. either by delivery or offset.
d. by a combination of delivery and offset.
Q:
Which of the following exchanges claims that its 3,600 members trade 50 different futures and options products by open auction and electronically?:a. Chicago Board Options Exchange.b. Chicago Board of Trade.c. Chicago Mercantile Exchange.d. Globex.
Q:
On the other side of every futures transaction is:a. the dealer.b. the futures exchange.c. the commodity producer.d. the clearinghouse.
Q:
Futures exchange members:a. trade strictly for their own accounts.b. trade strictly for others.c. can trade for their own accounts or for others.d. are all controlled by commodity firms.
Q:
Futures trade on the: a. Spot market.b. over-the-counter market.c. forward exchanges.d. futures exchanges.
Q:
Which of the following variables is not established on a futures contract?
a. contract size
b. price
c. delivery date
d. specified grade
Q:
Futures contracts were first traded on
a. stock indexes.
b. foreign currencies.
c. commodities.
d. government bonds.
Q:
A futures contract is a. a nonnegotiable, nonmarketable instrument. b. a security, like stocks and bonds. c. a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity. d. not a legal contract, and therefore its terms can be changed .
Q:
Spot markets are for immediate delivery. Forward prices are:a. The price agreed upon today for an asset for deferred delivery in the future.b. The price in the future for an asset delivered in the future.c. The price today for a forward price in the future.d. Based on current spot market prices
Q:
You buy 1,000 shares of Sunbeam at 11 1/8 and write 10 calls at a premium of 4 3/8 with a strike price of 7 1/2. The stock goes to 20 in 6 months. You receive a 8 cent dividend per share. If the calls are exercised (which is the likely assumption), what is your percentage return?
Q:
Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate of return is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.
Q:
Listed below are the option quotes on JUP, Inc., in January of this year. -------Calls---------------Puts--------Options/StrikeMarchJuneMarchJuneJUP 353 1/242-Jan1 1/837 401 1/224 1/2537 4511 1/28 3/8s37 502-Janrrs (a) Which calls are in the money? (b) Which puts are in the money? (c) Why are investors willing to pay 3 1/2 for the MARCH 35 call but only 1/2 for the March 35 put? (d) Calculate the intrinsic value of the June 35 call. (e) Calculate the intrinsic value of the March 40 put.
Q:
ABC, which closed at $151, has call options trading in April, July, and October with the following values: ------------Calls------------- Options/StrikeAprilJulyOctoberABC14011 ¼11 ¾131511501 ½34151160¾1 ½2 (a) Calculate the intrinsic value of the April 150 call. (b) Calculate the intrinsic value of the April 140 call. (c) Should the price of ABC rise to $156, what is the minimum value that the April 150 call should trade at?
Q:
An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if the price of XYZ rises to $60 within a week.
Q:
SCORP has puts and calls available for trading for the expiration months of June, September, and December. For the trading day May 2, 199X, SCORP closed at $40 per share. Strike prices for SCORP are $35, $40, and $45. The following prices for the 9 call options (3 expiration dates and 3 strike prices) for this date were (in scrambled order): A. 5 ½ F. 4 7/8 B. 4 G. 3/4 C. 2 1/16 H. 7 1/4 D. 6 3/8 I. 2 7/16 E. 3 1/8 Fill in the following matrix of prices for these calls, using LETTERS ONLY (i.e., A through I) JuneSeptemberDecember$35________________________$40________________________$45________________________
Q:
AB Flex Inc. stock is currently trading at $38. The time left until expiration of a call and put trading on AB Flex Inc.'s stock is 6 months and the strike price is $45. If the call is currently trading at $96 and the Treasury bill rate is 10 percent per year, what price should the put sell for?
Q:
What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?
Q:
How could an investor create 100 shares of artificial stock (i.e., a portfolio with the same payoffs as 100 shares of common stock)?
Q:
What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?
Q:
What type of equity derivatives are created by corporations?
Q:
List five options exchanges.
Q:
What is the put-call parity? How is it related to arbitrage?
Q:
What is a hedge ratio?
Q:
How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?
Q:
A stock investor wants to hedge the Microsoft stock in his portfolio. How can he use a protective put to do this?
Q:
A stock investor wants to hedge the Dell stock in his portfolio. How can he use a covered call to do this?
Q:
What is meant by portfolio insurance?
Q:
What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?
Q:
Three types of equity securities derivatives are: a. puts and calls created by corporations, and warrants created by investors. b. puts and calls created by investors, and warrants created by corporations. c. options, preferred stock, and commons stock created by corporations. d. options, stock, and warrants, created by corporations.
Q:
Spreads are used to:a. increase the return potentialb. circumvent option commissionsc. reduce risk in an option position.d. all of the above are true.
Q:
A combination of two calls and one put is called a:a. stripb. strapc. straddled. spread
Q:
The two basic spreads are the:time spread and price spreadput spread and call spreadtime spread and money spreadmoney spread and rate spread
Q:
A combination of one put and one call on the same stock with the same exercise price and date is known as a:
a. strip
b. straddle
c. strap
d. spread
Q:
Stock market index options are available on all of the following EXCEPT
a. the Standard and Poor's 500 Index.
b. the Major Market Index.
c. the National OTC Index.
d. the Shearson Lehman Hutton Index.
Q:
The way to protect a stock portfolio most in a bear market is to:
a. Buy stock index calls.
b. Buy stock index puts.
c. Write stock index calls.
d. Write stock index puts.
Q:
Concerning index options, which of the following statements is FALSE?
a. Index options appeal to speculators due to the leverage they offer.
b. Investors can write index options.
c. If exercised the holder of an index option receives the strike price.
d. Index options are settled in cash.
Q:
In the Black-Scholes model,
a. all of the inputs except two are observable.
b. all of the inputs except one are observable.
c. the greater the stock price, the lower the price of the call option.
d. there is an inverse relationship between the value of a call and interest rates in the market.
Q:
Which of the following statements is true regarding equity options contracts?
a. The majority of options contracts are standardized, including strike prices and time to maturity.
b. Investors typically create options contracts to trade amongst themselves.
c. Options contracts are typically customized to suit the needs of each investor.
d. Options are available on all publicly traded U.S. stocks
Q:
A stock is at $68. A two-month put (strike price = $70) is available at a $6 premium.. The intrinsic value is ___ and the time value is ____.
a. $0 . . . $4.
b. $3 . . . $5.
c. $2 . . . $4.
d. $2 . . . $3.
Q:
Which of the following statements is FALSE?
a. An in-the-money call occurs if the stock price exceeds the exercise price.
b. An out-of -the money call occurs if the stock price is less than the exercise
price.
c. If a call is out of the money, the intrinsic value is zero.
d. If a call is in the money, the intrinsic value is zero.
Q:
Which of the following statements is TRUE?
a. An American option's premium almost never declines below its intrinsic value.
b. If a call is in the money, its intrinsic value equals zero.
c. The speculative premium reflects the option's immediate value.
d. If the exercise price of an put is less than the stock price, the put is "out of the
money."
Q:
A (an) ---------- seeks to earn a return without assuming risk by constructing riskless hedges.speculatorcall writerput writerarbitrageur
Q:
------Call------ ------Put------Option/Strike Exp. Vol. Last Vol. Last.XYZ38 5/8 25 Dec. --- ----- 100 1/838 5/8 30 Nov. 250 8 ¾ 464 1/1638 5/8 30 Dec. --- ----- 572 5/1638 5/8 35 Nov. 154 4 1/2 1748 5/1638 5/8 35 Dec. 923 5 1/4 580 1 3/1638 5/8 35 Mar. --- ----- 33 2 5/838 5/8 40 Nov. 2023 1 1/8 530 2 3/8 The closest quote for the Dec. 25 call, were it to trade, would be a. 12. b. 4 7/8. c. 10 1/2. d. 13 5/8. Ans: d
Q:
------Call------ ------Put------Option/Strike Exp. Vol. Last Vol. Last.XYZ38 5/8 25 Dec. --- ----- 100 1/838 5/8 30 Nov. 250 8 ¾ 464 1/1638 5/8 30 Dec. --- ----- 572 5/1638 5/8 35 Nov. 154 4 1/2 1748 5/1638 5/8 35 Dec. 923 5 1/4 580 1 3/1638 5/8 35 Mar. --- ----- 33 2 5/838 5/8 40 Nov. 2023 1 1/8 530 2 3/8 Of the various combinations shown above, how many combinations of put contracts are currently trading "out-of-the-money?" a. 6 b. 5 c. 4 d. 1
Q:
------Call------ ------Put------Option/Strike Exp. Vol. Last Vol. Last.XYZ38 5/8 25 Dec. --- ----- 100 1/838 5/8 30 Nov. 250 8 ¾ 464 1/1638 5/8 30 Dec. --- ----- 572 5/1638 5/8 35 Nov. 154 4 1/2 1748 5/1638 5/8 35 Dec. 923 5 1/4 580 1 3/1638 5/8 35 Mar. --- ----- 33 2 5/838 5/8 40 Nov. 2023 1 1/8 530 2 3/8 Which of the following calls is not "in-the-money?" a. 25 Dec b. 30 Nov c. 35 Dec d. 40 Nov
Q:
An option is a wasting asset because as its expiration date approaches, its a. intrinsic value approaches zero. b. time value approaches zero. c. intrinsic value approaches its time value. d. price approaches zero.
Q:
Which of the following is true regarding option pricing:
a. the longer the maturity of the option, the higher the premium.
b. the more volatile the underlying stock, the lower the premium.
c. option prices are less volatile than equity prices.
d. the shorter the maturity of the option, the higher the premium.
Q:
If the price of the common stock exceeds the exercise price of a call for the holder the call is said to be
a. naked.
b. out of the money.
c. in the money.
d. covered.
Q:
The __________ is NOT a determinant of the value of a call option in the Black-Scholes model?
a. interest rate
b. exercise price of the stock
c. price of the underlying stock
d. expected beta of the underlying stock