Ch 12 - Managing Your Client’s Investment Risk Flashcards
four of the most common risks
- Inflation or purchasing power risk
- Credit risk
- Liquidity risk
- Currency risk
Evaluating the issuer’s ability to meet timely payments is known as
credit analysis
two measures of investment risk
- Standard deviation of returns, which measures an investment’s total risk
- Beta, which measures an investment’s systematic risk relative to the return of a benchmark index.
Factors taken into account for premium on option
- Relationship between the exercise price and the market price of the underlying asset
- Expected volatility of the underlying asset’s price
- Time left until the option expires.
Trading Unit of options in north america (# shares)
100 shares
What is an American-style option?
An option that can be exercised at any time up to the expiration date
What is a European style option?
exercised only at the expiration date
The in-the-money portion of a call or put option is known as
the option’s intrinsic value
Time value is equal to
Intrinsic value minus premium
Three things can take place between time option is bought and expires
- Can be cancelled through offsetting transaction
- Can be exercised
- Can expire Worthless
Explain how a cash settled option works
instead of delivering underlying asset, writer offers cash equal to option’s intrinsic value * Trading units * number of contracts
three differences of index style put option
- Must be European Style
- Cash Settled
- imperfect hedge as investor must exactly the same stocks in the same proportion as the index
Alternative to purchasing puts
Writing a call option
Use of Collars Strategy
To limit downside
What are Long-term Equity AnticiPation Securities (LEAPS) ?
Options that are originally listed with an expiration date that is three years away
