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My Series 65 > Derivatives > Flashcards

Derivatives Flashcards

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Series 65 flashcards
1
Q

Financial instrument whose value is based on the value and characteristics of another (underlying) security. Created by two investors rather than an issuer of stock and bonds

A

Derivative

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2
Q

Two parties agree to exchange cash flows based on different financial instruments

A

Swap Contracts

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3
Q

One party agrees to pay a fixed interest rate, but will receive a variable rate of interest. The other party agrees to the exact opposite. Settled on a net basis, payments will be based on the difference between the fixed and floating interest rates

A

Interest Rate Swap

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4
Q

Can be created on foreign currencies, commodities, stock prices, interest rates, or even bond defaults

A

Swap Contracts

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5
Q

In return for assuming the obligation, the writer receives the _____ from the option buyer

A

Premium

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6
Q

Name of the underlying security, expiration month, exercise price, type and premium

A

Components of an option

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7
Q

An option will only have an intrinsic value if it is

A

In-the-money

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8
Q

Amount by which an option is in-the-money

A

Intrinsic value

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9
Q

Intrinsic Value + Time Value

A

Option Premium

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10
Q

Portion of an option’s premium that exceeds its intrinsic value

A

Time Value

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11
Q

Calls are in-the-money if the stock market price is

A

Above the strike price

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12
Q

Calls are out-of-the-money if the stock market price is

A

Below the strike price

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13
Q

Puts are in-the-money if the stock market price is

A

Below the strike price

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14
Q

Puts are out-of-the-money if the stock market price is

A

Above the strike price of the option

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15
Q

Intrinsic value of an option will either be a _____ amount or _____

A

Positive amount or zero

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16
Q

Premium associated with at- or out-of-the-money options will consist only of

A

Time Value

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17
Q

Premium - Intrinsic Value

A

Time Value

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18
Q

An option’s _________ will diminish with the passage of time and, at expiration, it will have no remaining time value

A

Time Value

19
Q

On the final day prior to a contract’s expiration, an ____________ option will be trading very close to its intrinsic value, while an _________ option will be essentially worthless

A

In-the-money ; Out-of-the-money

20
Q

Don’t move uniformly when the underlying share price moves, move less than the underlying share price

A

Premiums

21
Q

Estimate of the amount by which an option premium will increase or decrease for a $1.00 change in the underlying stock price

A

Delta

22
Q

Option positions with positive deltas
Premium will rise as the stock’s price rises, but will fall as the stock’s price falls
In-the-money = Close to +1.0 or +100%
At-the-money = Close to +0.50 or +50%
Out-of-the-money = Close to 0 or 0%

A

Bullish (i.e., long calls and short puts)

23
Q

Option positions with negative deltas
Premium will fall as the stock’s price rises, but the premium will rise when the stock’s price falls
In-the-money = Close to -1.0 or -100%
At-the-money = -0.50 or -50%
Out of the money = Close to 0 or 0%

A

Bearish Options (i.e., long puts and short calls)

24
Q

Style of option where the option buyer may exercise the contract at any time during its life

A

American Style

25
Q

Style of option where the option buyer may only exercise the contract on the day of expiration

A

European Style

26
Q

Allows the investor to gain control of the stock (leverage) for a smaller amount of money than if she purchased the stock outright. If stock increases, she will profit and potential profit is almost unlimited. Risk is limited to the premium that she pays for it plus the commission costs
BULLISH ON A STOCK

A

Buying Calls

27
Q

Believes that the price of the underlying stock will potentially decline or remain stable (BEARISH)

A

Selling calls

28
Q

Involves selling a call against stock that an investor already owns. Allows investors to increase their portfolio’s return while also being partially protected against falling prices. Protection is limited to the premium received as a result of selling the call option

A

Writing covered calls

29
Q

Two types of option strategies that involve selling calls

A

Covered call writing and uncovered (naked) call writing

30
Q

Conservative option strategy

A

Writing covered calls

31
Q

High-risk option strategy

A

Writing uncovered calls

32
Q

Involves selling a call against stock that’s not already owned. Since the writer doesn’t own the stock, if exercised against, he will be required to buy the stock in the open market to complete delivery to the investor who exercised the call option

A

Writing uncovered calls

33
Q

Option strategy where there is no limit as to how high the price of the stock may rise; therefore, the writer’s potential loss is unlimited

A

Writing uncovered calls

34
Q

For bearish investors, buying a ___ may be an alternative to selling the stock short

A

Put

35
Q

Buyer of a call

A

Bullish ^

36
Q

Seller of a call

A

Bearish

37
Q

Buyer of a put

A

Bearish

38
Q

Seller of a Put

A

Bullish

39
Q

The purchase of both a call and a put or the sale of both a call and a put. Each option will have the same underlying security, the same exercise price, and the same expiration date

A

Straddles

40
Q

If an investor buys both options of a straddle, the position is referred to as

A

Long straddle

41
Q

If an investor writes (sells) both options of a straddle, it’s referred to as

A

Short straddle

42
Q

Not typically exchange-traded and their features are customized. Both the buyer and seller must come to an agreement for either party to transfer the contract to a third party

A

Forward contracts

43
Q

Extremely liquid and can be bought and sold on exchanges such as the Chicago Board of Trade

A

Futures contract

My Series 65 (9 decks)

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