Exam 3 - Chapter 15 [Slides] Flashcards

1
Q

Options are ____

A

Betting

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2
Q

Two options

A
  1. Call option contract

2. Put option contract

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3
Q

Call option contract

A

Right to sell

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4
Q

Pit option contract

A

Right to sell

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5
Q

Call option contract

A

The right, not the obligation, to buy an asset at a specified exercise price on or before specified expiration date.

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6
Q

Put option contract

A

The right, not the obligation, to sell an asset at a spice I fed exercise price on or before specified expiration date

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7
Q

The higher call option that you are willing to pay is called the

A

Option premium

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8
Q

In the money

A

Exercise would generate positive cash flow

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9
Q

Out of the money

A

Exercise would generate negative cash flow

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10
Q

At the money

A

Exercise price qualms asset price

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11
Q

What would you do if you have just obtained the option for free?

A

Choice 1: exercise it now if you u can
Choice 2: put off the exercise
Choice 3: sell it negotiable?

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12
Q

Why out of the options valuable?

A

It can change into them oeny

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13
Q

An asset ->

A

Underlying asset

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14
Q

Exercise price -> _____ price

A

Strike

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15
Q

Exercise only at expiratioin -> ____ option

A

European

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16
Q

Exercise on or before expiration -> ______ option

A

American option

17
Q

Sell short stocks

A

Need to borrow

18
Q

Sell short options

A

No need to borrow

19
Q

Options trading on organized exchanges

A

Standardized by allowable expiration date, exercise price and contract size

20
Q

Why standardized ?

A
  • Ease of trading

- liquid secondary market

21
Q

You do not need to know your _______

A

Counterparts

22
Q

The “Option Clearing Coportation” guarantees the ________ _____

A

Contract performance

23
Q

Options Clearing Coportation

A
  • Jointy owned by exchanges
  • Arranges exercised option through member firms
  • Require option writers to post margin
24
Q

Underlying assets

A
  • individual stocks
  • index
  • currency
  • interest rate
  • futures
  • and many others
25
Payoff at expiration
The payoff at expiration of a purchased the call with a $80 strike price
26
Profit at exportation
The profit at exploitation of ap ruchased 6-month call Edith strike price of $80
27
Callable bonds
Issued with coupon rate higher than the one of, otherwise identical, straight debt - inventor;’s compensation for call option retrained by issuer Usually include call protection period
28
Convertible securities
- convey options to holder rather than issuer | - typically give holder right to exchange for common stock, regardless of market price
29
Warrants
Options issued by firm to purchase shares of firm’s stock
30
Collateralized Loans
- Nonresource loan | - No resource beyond right to collateral
31
Equity of the firm as a call option
Underlying asset? Strike Price Expiration
32
Rain check
-
33
Asian options
Options with payoffs that depend on average price of underlying asset during portion of option life
34
Currency Translated options
Have either asset or exercise price denominated in foreign currency
35
Digital options
Have fixed payoffs that depend on the price of underlying asset