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Canadian Securities > Chap 10 : Derivatives > Flashcards

Chap 10 : Derivatives Flashcards

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SIE Exam flashcards
1
Q

A financial contract between two parties whose value is derived from, or dependent on, the value of an underlying asset.

A

Derivative

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2
Q

With _________ contracts, both parties oblige themselves to trade the underlying asset in the future at a price agreed upon today.

A

Forward

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3
Q

With _______, no upfront payment is required.

A

Forwards

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4
Q

A payment which gives the party on the other side of the transaction a higher level of assurance that the terms of the forward will be honoured.

A

Performance bond or good-faith deposit

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5
Q

With ______, the buyer makes a payment to the seller when the contract is drawn up. This payment, known as the premium, gives the buyer the right to buy or sell the underlying asset at a pre-set price on or before the expiration date.

A

Options

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6
Q

Another feature of derivatives is that, unlike financial assets such as stocks and bonds, they are considered ___________. the gain from an option or forward contract by one counterparty is exactly offset by the loss to the other counterparty. In other words, every dollar gained by one party represents a dollar lost by the counterparty.

A

zero-sum game

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7
Q

Most bonds trade in the _________ market

A

over-the-counter

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8
Q

Stocks and derivatives trade both on the _________ market and in __________

A

OTC

Organized exchanges

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9
Q

One of the attractive features of OTC derivatives to the corporations and institutional investors that use them is that contracts can be …………..

A

custom designed to meet specific needs

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10
Q

The derivatives exchange

A

Montreal Exchange

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11
Q

Another downside to the private nature of OTC derivatives is that __________ (also know as credit risk) is a major concern

A

default risk

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12
Q

____________, which are set up by exchanges to ensure that markets operate efficiently, guarantee the financial obligations of every party and contract.

A

Clearinghouses

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13
Q

The ___________ is responsible for clearing Montreal Exchange futures and option trades.

A

Canadian Derivatives Clearing Corporation

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14
Q

derivative transactions on exchanges are extensively regulated by ___________

A

the exchanges themselves and by gov’t agencies

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15
Q

OTC derivative transactions are…….

A

generally unregulated

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16
Q

Gains and losses accrue on a day-to-day basis is known as _______

A

Marking to Market

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17
Q

The two general categories of underlying assets for derivative contracts are _______- and _______.

A

Commodities and Financial Assets

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18
Q

___________ and options are commonly used by producers, merchandisers, and processors of commodities to protect themselves against fluctuating commodity prices.

A

Commodity Futures

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19
Q

A __________ opportunity refers to a scenario where the same asset or commodity is traded at different prices in two separate markets. By purchasing low in one market and selling high in the other market simultaneously, an investor locks in a fixed amount of profit at no risk

A

Arbitrage

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20
Q

_____________ is a method of boosting returns on an underlying investment portfolio by taking a speculative position based on expectations of future market movements. The most popular way to enhance an investment’s yield is by selling options against the position.

A

Yield Enhancement

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21
Q

An option that gives its holder the right to buy, and the seller the obligation to sell, the underlying asset is known as a _________

A

Call Option

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22
Q

An option that gives the holder the right to sell, and its writer the obligation to buy, the underlying asset is referred to as a _________

A

Put Option

23
Q

_______________is the price at which the underlying asset can be purchased or sold in the future. The buyer and the seller agree on this future price when they enter into the option contract

A

The Strike price or Exercise Price

24
Q

To obtain the right to buy or sell the underlying asset, option buyers must pay the sellers a fee, known as the ………

A

option premium

25
Q

___________ style options can be exercised at any time, up to and including the expiration date.

A

American

26
Q

_______style options can be exercised only on the expiration date.

A

European

27
Q

A ________________ is simply a long-term option contract offering the same risks and rewards as a regular option

A

Long-term equity anticipation security

28
Q

A ___________ transaction occurs when an investor establishes a new positon in an option contract.

A

Opening

29
Q

Positions may be liquidated prior to expiration by way of an……..

A

offsetting transaction

30
Q

The party of the long position will exercise the option. When this happens, the party holding the short position is said to be _______ on the option

A

Assigned

31
Q

Owners of options will exercise only if it is in their best financial interest, which can only occur when an option is ____________

A

in-the-money

32
Q

Owners of options will not exercise if they are __________-

A

out of the money or at the money

33
Q

___________ is the value of certainty

A

Intrinsic Value

34
Q

If an option is not in-the-money, it has ___________ value

A

zero intrinsic value

35
Q

__________ are bought to establish a maximum purchase price for the stock, or to limit the potential losses on a short position in the stock. In this sense, options act much like insurance by protecting the buyer when the stock price moves higher

A

Call options

36
Q

___________ writers own the underlying stock, and use this position to meet their obligations, if they are assigned.

A

Covered Call

37
Q

_________writers do not own the underlying stock

A

Naked Call

38
Q

When a forward is traded on an exchange, it is called a _____________

A

Futures Contract

39
Q

_______ can trade on an exchange or OTC markets

A

Forwards

40
Q

When a forward is traded OTC, it is generally referred to as a……..

A

Forward Agreement

41
Q

Many financial futures are based on underlying assets that are difficult or even impossible to deliver. For those types of futures, delivery involves an exchange of cash from one party to the other. The amount is based on the performance of the underlying asset from the time the future was entered into until the time that it expires. These futures are known as _________

A

Cash Settled Futures Contracts

42
Q

Like call options, ______ and _______ are securities that give their owners the rights, but not the obligation, to buy a specific amount of stock at a specified price on or before the expiration date.

A

Rights and Warrants

43
Q

Rights and Warrants are usually issued by a ______ as a method of raising capital.

A

Company

44
Q

_____ are usually short term, with the expiration date often as little as four to six weeks after they are issued

A

Rights

45
Q

______ tend to be issued with three to five years to expiration

A

Warrants

46
Q

A _______ is a privilege granted to an existing shareholder to acquire additional shares directly from the issuing company.

A

Right

47
Q

The exercise price of a right, known as the ______ price or ________ price, is the price shareholders pay to purchase additional shares of the company. The offering price is almost always lower than the market price of the shares at the time that their rights are issued. This discount makes the rights valuable and gives shareholders an incentive to exercise them.

A

Subscription or Offering price

48
Q

As with options, the trading price of a right is equal to the ____________, if any, plus the time value.

A

Intrinsic Value

49
Q

You have to add +1 to the denominator of the Intrinsic Value of Rights equation during the __________ period, when the rights are imbedded in the common stock.

A

Cum Rights

50
Q

A ________ is a security that gives its holders the right to buy shares in a company from the issuer at a set price by a set period of time

A

Warrant

51
Q

Warrants are like call options. The main difference is……..

A

Warrants are issued by the company itself, whereas call options are issued by other investors.

52
Q

Warrants are often issued as part of a package that also contains a new debt or preferred share issue. The warrants help make these issues more attractive to buyers by giving them the opportunity to participate in any appreciation of the issuer’s common shares. In other words, they function like, and are known, as a _________.

A

Sweetener

53
Q

The predominant type of Forward Agreements are based on _______ and _______

A

Interest Rates and Currencies

54
Q

If the put writer had set aside an amount of cash equal to the purchase value of the stock if assigned, the strategy is known as a…..

A

cash-secured put write

Canadian Securities (14 decks)

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