Exam 3 - Chapter 15 [Slides]

Question 1

Options are ____

Answer 1

Betting

Question 2

Two options

Answer 2

1. Call option contract

2. Put option contract

Question 3

Call option contract

Answer 3

Right to sell

Question 4

Pit option contract

Answer 4

Right to sell

Question 5

Call option contract

Answer 5

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

Question 6

Put option contract

Answer 6

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

Question 7

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

Answer 7

Option premium

Question 8

In the money

Answer 8

Exercise would generate positive cash flow

Question 9

Out of the money

Answer 9

Exercise would generate negative cash flow

Question 10

At the money

Answer 10

Exercise price qualms asset price

Question 11

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

Answer 11

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

Question 12

Why out of the options valuable?

Answer 12

It can change into them oeny

Question 13

An asset ->

Answer 13

Underlying asset

Question 14

Exercise price -> _____ price

Answer 14

Strike

Question 15

Exercise only at expiratioin -> ____ option

Answer 15

European

Question 16

Exercise on or before expiration -> ______ option

Answer 16

American option

Question 17

Sell short stocks

Answer 17

Need to borrow

Question 18

Sell short options

Answer 18

No need to borrow

Question 19

Options trading on organized exchanges

Answer 19

Standardized by allowable expiration date, exercise price and contract size

Question 20

Why standardized ?

Answer 20

• Ease of trading

- liquid secondary market

Question 21

You do not need to know your _______

Answer 21

Counterparts

Question 22

The “Option Clearing Coportation” guarantees the ________ _____

Answer 22

Contract performance

Question 23

Options Clearing Coportation

Answer 23

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

Question 24

Underlying assets

Answer 24

• individual stocks
• index
• currency
• interest rate
• futures
• and many others

Question 25

Payoff at expiration

Answer 25

The payoff at expiration of a purchased the call with a $80 strike price

Question 26

Profit at exportation

Answer 26

The profit at exploitation of ap ruchased 6-month call Edith strike price of $80

Question 27

Callable bonds

Answer 27

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

Question 28

Convertible securities

Answer 28

• convey options to holder rather than issuer

- typically give holder right to exchange for common stock, regardless of market price

Question 29

Warrants

Answer 29

Options issued by firm to purchase shares of firm’s stock

Question 30

Collateralized Loans

Answer 30

• Nonresource loan

- No resource beyond right to collateral

Question 31

Equity of the firm as a call option

Answer 31

Underlying asset?
Strike Price
Expiration

Question 32

Rain check

Answer 32

-

Question 33

Asian options

Answer 33

Options with payoffs that depend on average price of underlying asset during portion of option life

Question 34

Currency Translated options

Answer 34

Have either asset or exercise price denominated in foreign currency

Question 35

Digital options

Answer 35

Have fixed payoffs that depend on the price of underlying asset