E. compare positions an investor can take in an asset;

Question 1

Call - The exposure to the underlying risk is positively correlated to the position

Short position, Short exposure to the underlying risk

Long position, Long exposure to the underlying risk

Put - The exposure to the underlying risk is inversely related to the position

Short Position, Long exposure to the Underlying Risk

Long position, Long exposure to the underlying risk

Answer 1

the quantity of the security or contract that a trader owns or owes.

Question 2

A portfolio

Answer 2

is a collection of positions

Question 3

A leveraged Position

Answer 3

is one acquired by borrowing

Question 4

Long Positions

Answer 4

A long position in an asset represents current or future ownership. A long position benefits when the asset increases in value. Note that with put options, the long (put option holder) benefits when the price of the underlying asset decreases • Traders have long positions in securities and contracts when they own them. • They generally acquire these positions by buying them. • Traders hold long positions when they expect prices to rise. The buyer of an option (either a call or put) is said to be long the option

Question 5

Short Positions in Securities

Answer 5

A short position represents an agreement to sell or deliver an asset or results from borrowing an asset and selling it (i.e., a short sale). A short position benefits when the asset decreases in value. When an investor buys a security by borrowing from a broker, the investor is said to buy on margin and has a leveraged position. The risk of investing borrowed funds is referred to as financial leverage. More leverage results in greater risk. • Traders have short positions in securities when they borrow securities and sell them. • They owe the securities to the security lenders from whom they borrowed the securities. • They repay these security loans when they repurchase the securities.

Question 6

Short Positions in Contracts

Answer 6

• Traders have short positions in contracts when they sell contracts that they do not own. • Short sellers of contracts create new contracts when they sell. the writer of an option is said to be short the option the short (put option writer) benefits when the price of the underlying asset increases

Question 7

Short Positions

Answer 7

• Traders hold short positions when they expect prices to fall. • If they are wrong, their losses are unbounded. – Long holders can lose only the value of their positions. Proceeds from the short sale must remain in the brokerage account along with the required margin deposit. The short seller must pay any dividends on the stock to the owner of the borrowed shares. The short seller must also deposit margin money to guarantee the eventual repurchase of the security.

Question 8

Risk Exposure

Answer 8

• Contracts provide exposure to the risk of underlying instruments. • If a decrease in the value of the underlying instrument increases the value of the contract, a long position in the contract represents short exposure to the underlying risk. – Put contracts and bearish (inverted) ETFs are examples of bearish instruments. We say that a put buyer is long the option but has short exposure to the underlying asset price.