Intro To Derivatives

Question 0

Ask Price

Answer 0

The price at which the market maker is sellqing (i.e. “Asking”)

The price at which an investor may buy

Question 1

Give 4 uses for derivatives

Answer 1

Speculation
Risk Management
Reduced transaction costs
Regulatory Arbitrage

Question 2

Bid Price

Answer 2

Price at which the market maker is buying (i.e. “bidding”)

Price at which investor can sell

Question 3

Round-Trip Cost

Answer 3

Difference between what you pay and what you receive from a sale

Pay: Ask Price + fees
Receive: Bid Price - fees

Question 4

3 Reasons to short sell

Answer 4

Speculation
Raise money
Hedging

Question 5

Credit Risk

Answer 5

Risk that short seller won’t have enough money to buy back the asset in order to close the position

Question 6

Short Rebate*

Answer 6

Amount short-seller earns on the proceeds from the short sale

Question 7

Lease Rate of an Asset

Answer 7

Annualized payment required to borrow an asset (e.g. Dividends on the short sale of stock)