Chapter 15

Question 1

A _______-based index measures the market as a whole.

Answer 1

broad-based

Question 2

A _______-based index measures the movement of a particular sector or industry.

Answer 2

narrow-based

Question 3

What are two uses of index options?

Answer 3

To speculate on market movement or to hedge a portfolio

Question 4

Is there any difference between the exercise of an index option and an equity option?

Answer 4

Yes, index options are cash-settled while equity options are settled by delivery of a specific security.

Question 5

Equity options are based on a 100 share multiplier, while index options are based on a $______ multiplier.

Answer 5

$100

Question 6

Upon exercise, what must index option sellers deliver to the buyers?

Answer 6

The in-the-money amount of the contract (based on the close) multiplied by $100

Question 7

An investor buys an OEX May 475 call at 10. What is his strategy?

Answer 7

Bullish

Question 8

An investor buys an OEX May 475 call at 10. What is his breakeven point?

Answer 8

485

Question 9

An investor buys an OEX May 475 call at 10. What is his maximum gain?

Answer 9

unlimited

Question 10

An investor buys an OEX May 475 call at 10. What is his maximum loss?

Answer 10

The premium of $1,000 (the value of 10 x $100)

Question 11

World currencies trade in the _____________________.

Answer 11

Interbank Market

Question 12

What are the hours of operation for the Interbank Market?

Answer 12

24 hours a day

Question 13

True or False: The Interbank Market is a fully regulated and centralized market.

Answer 13

False. The Interbank Market is unregulated and decentralized.

Question 14

What is the settlement for spot trades?

Answer 14

two business days

Question 15

For most world currency quotes, the decimal must be moved how many places to the left to convert to U.S. dollars?

Answer 15

two places to the left; except for Japanese Yen which moves 4

Question 16

To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved ______ places to the left.

Answer 16

4

Question 17

How is the premium for a world currency option calculated?

Answer 17

Contract size x the premium (with decimal moved appropriately)

Question 18

True or False: If an investor expects the U.S. dollar to strengthen, she could profit by buying U.S. dollar calls.

Answer 18

False. There are no U.S. dollar calls or puts issued; therefore, all answers must be based on a world currency.

Question 19

True or False: The buyer of a British pound call will profit if the British pound rises with a falling U.S. dollar.

Answer 19

True

Question 20

There is an inverse relationship between the movement of a world currency and the _____________.

Answer 20

U.S. Dollar

Question 21

Interest rate options are ______-based.

Answer 21

price-based

Question 22

Yield-based options are ______-based.

Answer 22

yield-based

Question 23

An investor, believing interest rates will rise, could profit by taking what interest-rate option position?

Answer 23

Buy interest-rate puts or write interest-rate calls

Question 24

An investor, believing interest rates will rise, could profit by taking what yield-based option position?

Answer 24

buy yield-based calls or write yield-based puts

Question 25

What is the primary use of VIX options?

Answer 25

To give individual investors the ability to trade market volatility

Question 26

What could an investor do if she expects the market to decline and volatility to increase?

Answer 26

Buy VIX calls

Question 27

What could an investor do if she expects the market to rise and volatility to decrease?

Answer 27

Buy VIX puts

Question 28

VIX options use a __________ style exercise and settle in ______.

Answer 28

European style exercise | settle in cash

Question 29

Volatility tends to increase during a ___________ market.

Answer 29

declining

Question 30

What is the VIX?

Answer 30

The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility

Question 31

What is the underlying instrument used to calculate the VIX?

Answer 31

Real-time S&P 500 option bid/ask quotes weighted to a constant 30-day measure of expected volatility

Question 32

What should an investor do on the VIX if she anticipates an increase in volatility?

Answer 32

Buy VIX Calls. If volatility increases, the underlying VIX will rise and the calls will increase in value.

Question 33

When does volatility tend to increase?

Answer 33

When the market (S&P 500) drops abruptly

Question 34

Identify the acronym: VIX

Answer 34

CBOE's Volatility Index

Question 35

The underlying asset of an interest rate option is a _________ instrument.

Answer 35

treasury