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Securities Analysis > Final Exam Ch. 20,22 > Flashcards

Final Exam Ch. 20,22 Flashcards

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SIE Exam flashcards
1
Q

Purchasing a straddle means…

A

Buying both a put and a call on the stock

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2
Q

What would be a simple options strategy using a put and a call to exploit your conviction about the stock’s future movement?

A

Sell a straddle

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3
Q

A long straddle produces gains if…2

A

Prices move up or down and

Limits losses if prices don’t move

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4
Q

A short straddle produces significant losses if…

A

Prices move significantly up or down

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5
Q

A bullish spread produces limited gains if…

A

Prices move up

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6
Q

Long put options gain when…

A

Stock prices fall

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7
Q

Long put options produce very limited losses if…

A

Prices instead rise

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8
Q

Short calls also gain when…

A

Stock prices fall

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9
Q

Short calls create limited losses if…

A

Prices rise

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10
Q

If your return is up to your client’s expectations, and there is a good chance of large gains or large losses in the market, what is your best options position?

A

Long straddle

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11
Q

If your return is up to your clients expectations and there is a good chance of large losses between now and the end of the year, what is your best options position?

A

Long put options

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12
Q

If the buyer of the option elects to exercise the option and buy the stock at the exercise price, the seller of the option must go into the open market and…

A

Buy the stock to sell the stock to the buyer of the contract

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13
Q

If the buyer of the option elects to exercise the option and buy the stock at exercise price, this transaction is…

A

A naked call option

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14
Q

The writers potential loss on a noted call option is unlimited because…

A

The market price of the stock is unlimited

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15
Q

3 factors the directly relate to the price of the stock option?

A

1 the risk free rate
2 the riskiness of the stock
3 the time to expiration

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16
Q

For any given level of the stock index, the futures price will be lower when…

A

The dividend yield is higher

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17
Q

The parity relationship tells us that the futures price is determined by…3

A

1 stock price

2 interest rate

3 dividend yield

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18
Q

The short futures positions will profit when, the S&P 500…

A

Falls

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19
Q

The short futures position is a…

A

Negative beta position

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20
Q

If a futures price falls 1% with a 10% margin, the percent return on the net investment is…

A

-10%

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21
Q

If the T-Bill is less than the dividend yield, then the futures price should be…

A

Less than the spot price

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22
Q

Futures contracts are…

While forward contracts are…

A

Futures are standardized

Forwards are not standardized

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23
Q

Futures contracts are standardized and are…

A

Traded on organized exchanges

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24
Q

Forward contracts are not traded on organized exchanges, the participant…

And banks and brokers…

A

Participant negotiates the delivery of goods

Banks and brokers negotiate contracts as needed

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25
Q

The buyer of a futures contract is said to have a…

A

Long position

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26
Q

The seller of a futures contract is said to have a…

A

Short position

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27
Q

The trader taking a long position on a futures contract commits to…

A

Purchase the commodity on the delivery date

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28
Q

The trader taking the short position on the futures contract commits to…

A

Delivering the commodity at contract maturity

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29
Q

No money exchanges hands at time that…

A

Traders commit to buying or selling futures contract

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30
Q

Investors who take long positions in futures agree to…

A

Take delivery of commodity on delivery date

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31
Q

Investors who take short positions on futures agree to…

A

Make delivery of commodity

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32
Q

The terms of futures contracts such as the quality and quantity of the commodity and delivery date are specified by…

A

The futures exchanges

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33
Q

The futures exchanges specify all the terms of the contracts except…2

A

Price

Traders bargain over the price

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34
Q

Open interest in futures at a particular time is…

A

The number of futures contracts outstanding

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35
Q

When futures contracts begin trading, open interest is…

A

Zero

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36
Q

When contracts begin trading, open interest is zero. As time passes…

A

More contracts are entered

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37
Q

Most futures contracts are liquidated…

A

Liquidated before maturity date

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38
Q

The long futures position is considered the buyer. To close out the position one must…

A

Take a reversing position or sell the contract

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39
Q

A call option gives the holder the right to purchase an asset for a specified price called the…

A

Strike price before the expiration date

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40
Q

With a call option, you exercise the option to buy the underlying asset if…

A

The market value is greater than the strike price

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41
Q

A put option gives its holder the right to…

A

Sell an asset

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42
Q

A put option gives its holder the right to sell an asset…2

A

At the exercise or strike price

On or before the expiration date

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43
Q

With a put option, you exercise the option to sell the underlying asset if…

A

The market value is less than the strike price

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44
Q

Derivatives are securities that get their value from…

A

The price of other securities

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45
Q

Derivatives can be powerful tools for…2

A

Hedging or speculation

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46
Q

The purchase price of the option is called the…

A

Premium

47
Q

Sellers (writers) of options receive…

A

Premium income

48
Q

If the holder exercises the option, the writer must…

A

Make call or take put delivery of the underlying asset

49
Q

In the money: exercise of the option…

A

Produces positive cash flow

50
Q

Out of the money: exercise of the option would…

A

Not be profitable

51
Q

At the money…

A

Exercise price and asset price are equal

52
Q

American style option

A

Option can be exercised at any time before expiration or maturity

53
Q

European style option

A

Option can only be exercised on the expiration or maturity date

54
Q

In the US most options are…

A

American style

55
Q

What 2 kinds of options in the US are not American style

A

Currency and stock index options

56
Q

An all option portfolio responds more than proportionately to changes in stock value, because it is…

A

Levered

57
Q

An insurance stock option strategy involves…

A

Example 90% Tbills

10% options

58
Q

In an insurance option strategy, some potential return is…

A

Sacrificed to limit downside risk

59
Q

Puts can be used as insurance against…

A

Stock price declines

60
Q

Protective puts lock in…

A

Minimum portfolio value

61
Q

The cost of insurance of the put is the…

A

Put premium

62
Q

Covered calls 2

A

Purchase stock and

write calls against it

63
Q

Under covered calls, the call writer gives up any stock value…

A

Above X in return for initial premium

64
Q

Under covered calls, if you plan to sell stock when the price rises above X anyway, the call imposes…

A

Sell discipline

65
Q

Long straddle

A

Buy call and put with same exercise price and maturity

66
Q

The straddle is a bet on…

A

Volatility

67
Q

To make a profit under a straddle, change in stock price must…

A

Exceed the cost of both options

68
Q

The writer of a straddle is betting the stock price will…

A

Not change much

69
Q

Spread 2

A

1) combination of 2 or more calls or puts on same stock

2) with differing exercise prices or times to maturity

70
Q

Under a spread, some options are…3

A

1 bought

2 others are sold

3 or written

71
Q

A bullish spread is a way to profit from…

A

Stock price increases

72
Q

A collar is an options strategy that…

A

Brackets value of portfolio between 2 boun

73
Q

Collars limit downside risk by…

A

Selling upside potential

74
Q

Under a collar You can buy a protective put to…

A

Limit downside risk of a position

75
Q

Under a collar, you fund the put purchase by…

A

Writing a call

76
Q

Under a collar you fund a put purchase by writing a call, the net outlay for options is…

A

Approximately zero

77
Q

Forward 2

A

Deferred delivery sale of asset

With sales price agreed on now

78
Q

Futures are similar to forward but…

A

Feature formalized and standardized contracts

79
Q

Key differences in futures 3

A

1 standardized contracts create liquidity

2 marked to market

3 exchange mitigates credit risk

80
Q

Futures contract is an obligation to…

A

Make or take delivery of underlying asset at a predetermined price

81
Q

Futures price:

The price of the underlying asset is…

Settlement is determined…

A

Determined today

Settlement determined at future date

82
Q

3 things the futures contract specifies about the underlying asset

A

1 quantity

2 quality

3 how it will be delivered

83
Q

Futures:

Long is the commitment to…

A

Purchase commodity on delivery date

84
Q

Futures:

Short is the commitment to…

A

Sell commodity on delivery date

85
Q

Futures are traded on…

A

Margin

86
Q

At the time the futures contract is entered into…2

A

No money changes hands

Except the margin collateral

87
Q

A futures contract is a zero sum gain which means…

A

Gains and losses net out to zero between buyers and sellers

88
Q

Unlike a call option, the payoff to the long position can be negative because the futures trader…

A

Cannot walk away from the contract if it is not profitable

89
Q

Futures contracts are traded on a wide variety of assets in 4 main categories

A

1 agricultural commodities
2 metals and minerals
3 foreign currencies
4 financial futures

90
Q

Electronic trading for futures has mostly…

A

Displaced floor trading

91
Q

CBOT and CME merged in 2007 to form…

A

CME group

92
Q

The CME group exchange acts as…

A

Clearing house and counterparts to both sides of the trade

93
Q

The net position of the clearing house is…

A

Zero

94
Q

Most futures contracts are closed out by…

A

Reversing trades

95
Q

Only 1-3% of futures contracts result in…

A

Actual delivery of underlying commodity

96
Q

Marking to market

A

Each day the profits or losses from new futures price are paid to or subtracted from account

97
Q

Convergence of price

A

As maturity approaches, the spot and futures price converge

98
Q

Initial margin, is funds or interest earning securitities…

A

Deposited to provide capital to absorb losses

99
Q

Maintenance margin

A

Level at which account must be replenished or position reduced

100
Q

Margin call, if account equity shrinks and the maintenance margin is reached…

A

Broker will ask for additional margin funds

101
Q

Speculators

A

Seek profit from price movement

102
Q

Hedgers

A

Seek protection from price movement

103
Q

Long hedge

A

Protecting against rise in purchase price

104
Q

Short hedge

A

Protecting against fall in selling price

105
Q

Basis (futures)

A

Difference between futures price and spot price

106
Q

Basis risk, variability of basis means that gains and losses on asset and contract…

A

May not perfectly offset if liquidated before maturity

107
Q

Spot futures parity theorem, 2 ways to acquire asset for some date in the future

A

1 purchase it now and store it

2 take long position in futures

108
Q

The 2 strategies of the spot futures parity theorem must have the…

A

Same market determined costs

109
Q

Spot futures parity theorem, with a perfect hedge…

A

Futures payoff is certain, there is no risk

110
Q

A perfect hedge can earn the risk less rate of return, this relationship can be used to…

A

Develop the futures pricing relationship

111
Q

If spot futures parity is not observed then…

A

Arbitrage is possible

112
Q

Arbitrage opportunity:

If futures price is too high then…2

A

1 short the futures and

2 acquire stock by borrowing money at risk free rate

113
Q

Arbitrage opportunity:

If the futures price is too low then…3

A

Go long futures and

Short stock and

Invest proceeds at risk free rate

Securities Analysis (4 decks)

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