Derivatives

Question 1

What are derivatives?

Answer 1

Derivatives are leveraged instruments where participants put up a small amount of money and obtain the gain or loss on a much larger position

Question 2

What are derivatives used for?

Answer 2

Speculation and Hedging

Question 3

What is speculation?

Answer 3

Buying or selling a derivative contract in order to earn a leveraged rate of return

Question 4

What is hedging?

Answer 4

Entering into a derivatives contract to reduce the risk associated with positions or commitments in their line of business – getting rid of risk

Question 5

A ____ contract is an agreement to transact involving the immediate exchange of assets and funds

Answer 5

Spot

Question 6

A ____ contract is a non standardized agreement to buy or sell an asset in the future with the terms of the deal set when the contract is created

Answer 6

Forward

Question 7

A ____ contract is a standardized exchange traded version of a forward contract

Answer 7

Futures

Question 8

How do future contracts differ from forwards contracts?

Answer 8

They are marketable, have reduced counterparty risk, employ margin requirements and daily making to market

Question 9

How are futures contracts traded?

Answer 9

They are traded in pits using an open outcry auction among exchange members

Question 10

Professional traders trade for their ___ accounts

Answer 10

Own

Question 11

What are some future contract terms?

Answer 11

• trading unit - deliverable grades
• tick size - price quote
• contract months - last trading day
• last delivery day - delivery method
• trading hours - ticker symbols
• daily price limit

Question 12

A ___ position is the purchase of futures contract

Answer 12

long

Question 13

A ___ position is the sale of a futures contract

Answer 13

short

Question 14

A ___ is the unit that oversees trading on the exchange and guarantees all trades made by the exchange

Answer 14

clearinghouse

Question 15

__ ____ is the total number of the futures, put options, or call options outstanding at the beginning of the day

Answer 15

Open interest

Question 16

When you are long on stock you are?

Answer 16

Happy

Question 17

When you are short on stock you are?

Answer 17

Sad

Question 18

A ____ margin is a deposit required on futures trades to ensure that the terms of the contracts will be met

Answer 18

initial

Question 19

The ____ margin is the margin a futures trader must maintain once a futures position is taken

Answer 19

maintenance

Question 20

A ___ is a contract that gives the holder the right but not the obligation to buy or sell the underlying asset and the specified price within a specified period of time

Answer 20

option

Question 21

A ___ option in an option that gives the purchaser the right, but not the obligation to buy the underlying security form the writer of the option at a specified exercise price on a specified date

Answer 21

Call

Question 22

A ____ option is an option that gives the purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a specified exercise price on a specified date

Answer 22

put

Question 23

If you have an option as long as stock stays a certain amount you keep money, and once it goes above a price you lose money. What type is this?

Answer 23

Written the call option

Question 24

out of the money is when a stock is ___ the strike price

Answer 24

below

Question 25

The Black Scholes option pricing model s a function of ___ (name a few)

Answer 25

• The spot price of the underlying asset
• the exercise price on the option
• the options exercise date
• the price volatility of the underlying asset
• the risk free rate of interest

Question 26

The intrinsic value of an option is the difference between an options____ price and the ____ ___ price

Answer 26

exercise, underlying asset

Question 27

Most option traders care most about ___

Answer 27

volatility

Question 28

A ___ option can be exercised at any time before and one the expiration date

Answer 28

American

Question 29

A ___ option can ve exercised only on the expiration date

Answer 29

European

Question 30

The underlying asset on a futures option is a ____ contract

Answer 30

futures

Question 31

A digital default option pays a stated amount in the event of a ___ default

Answer 31

loan

Question 32

The value of a credit spread call option ____ as the default risk premium or yield spread on a specified benchmark bond of the borrower ____ above some exercise spread

Answer 32

increases, increases

Question 33

A ___ is an agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval

Answer 33

swap

Question 34

A ___ ____ ___ is an exchange of fixed interest payments for floating interest payments by two counterparties

Answer 34

interest rate swap

Question 35

A ____ swap is a periodic exchange of one currency for another between parties

Answer 35

currency swap

Question 36

Credit default swaps (CDS) allow financial institutions to

Answer 36

hedge credit risk

Question 37

Are swap markets standardized contracts?

Answer 37

No

Question 38

A ___ is a call option on interest rates often with multiple exercise dates

Answer 38

Cap

Question 39

A ___ is a put option on interest rates, often with multiple exercise dates

Answer 39

floor

Question 40

A ___ is a position taken simultaneously in a cap and a floor

Answer 40

collar