Introduction to Derivatives Flashcards
How would you describe the risk associated with buying a futures contract?
Limited to the futures price
European options are:
Options that may be exercised on their expiry date only
Which of the following is true of a call option?
It is used to hedge a short underlying position
Which ONE of the following is an example of speculative activity?
An investor who expects the price of tin to fall, writing naked call options
Which of the following are choices for the buyer of a futures contract:
Hold the future to expiry and then take delivery of the underlying
Sell the future before expiry
The premium on an equity index option is:
Paid one day after the trade date (T+1)
Which of the following is true of a call option?
It is used to hedge a short underlying position
An exchange-traded option with non-standardised terms, which is centrally-cleared, is which type of option?
A FLEX option
Which of the following best describes a call option?
The right to buy an underlying asset at an agreed price on a future date
Which of the following types of broker acts as an intermediary between other market participants, allowing them to remain anonymous?
Inter-dealer broker
Which of the following best describes how easy it is for a trader to open or close a position without incurring excessive trading costs?
Liquidity
In the event that the option is exercised which of the following would take delivery of the asset?
Writer of a put
Which of the following is NOT a common form of arbitrage?
Value-added
An investor wishes to speculate on the US dollar strengthening against the euro. Which of the following strategies would she adopt?
Go short Euro futures
Which profile best fits a short put position?
Bullish, maximum gain is the premium, maximum loss is strike minus premium
What position will the writer of a call on a future be in if the option is exercised?
Short-future
The features of a long-call option are:
Limited losses with unlimited profits
Which of the following best describes an American option?
An option exercisable at any time up to its expiry date
In a standardised option contract, which of the following is not fixed in advance?
Premium
Which of the following is not true with regard to futures?
A short-futures position is closed-out by selling a future
Which profile best fits a short-put position?
Bullish: maximum gain is the premium, maximum loss is strike minus premium
An agreement to buy a specified quantity of a specified asset on a specified future date best describes:
A long futures position
A currency trader anticipates yen will strengthen against the US dollar. Which of the following should he choose?
Buy a yen call
An agreement to buy a specified quantity of a specified asset on a specified future date best describes:
A long-futures position
The exercise price of a traded option is:
The price the holder will pay or receive for the underlying if the option is exercised
Which of the following best describes a future?
An agreement to buy or sell a specified quantity of a specified asset on a fixed future date at a price agreed today
What is a future?
An agreement to buy or sell an asset at a certain time in the future for a certain price
Which of the following options do not give you the right to exercise?
Short-put
Short-call
How would you describe the risk associated with buying a futures contract?
Limited to the future’s price
The maximum potential loss which could be incurred by the holder of a put option is:
The premium for the option
The maximum risk from a short futures position is:
Unlimited
The maximum loss is the premium
The maximum loss is the premium paid for the option originally.
Out of the examples listed below, indicate those firms that are considered sell side:
Investment Banks
Brokerage
Which of the following is NOT a contingent liability transaction?
Buying an option
A US exporter has made a sale of goods worth €1.5m to Germany. How could he hedge his exposure to exchange rate fluctuations before the money is received?
Sell euro futures
Buy euro puts
All futures transactions are:
Contingent liability transactions
Which of the following would describe liquid markets?
High supply, low price elasticity
What is the maximum loss for the writer of a put option?
Strike minus premium
A Japanese investor has substantial Sterling assets and uses Sterling currency futures to offset his risk. This trade is known as:
Hedging
Which of the following is true of a European style call option?
The seller may be obliged to sell the underlying only at maturity
An equity manager wishing to gain exposure to equity in advance of a cash inflow from a client would do which of the following?
Buy a FTSE100 index call option
Which of the following are uses of futures?
Arbitrage
Speculation
Hedging
Cash and carry
Which of the following is TRUE of a call option?
It can be used to hedge a short underlying position
Total premium paid
Total premium paid = premium x contract size x no. of contracts:
A long-put option position has potential for:
Limited profit and limited loss
Which of the following is NOT true of a put contract?
The writer can choose not to buy the specified asset
All of the following are determined by the exchange in relation to contract specifications on options, except:
Premium
Which of the following represents the best hedge if a fund manager holds a portfolio of gilts?
Sell long gilt futures
Which two of the following are true of the impact of liquidity on transaction costs (i.e. the spread between bid and offer prices) and elasticity of prices (in comparison to volume)?
Greater liquidity = lower transaction costs, lower elasticity
Which of the following features of an exchange traded option is negotiable?
Premium
Which of the following best describes an equity hedge?
Take the opposite position in your equity futures to the one you hold in equity itself
Which of the following is true of a European call option?
The seller may be obliged to sell the underlying only at maturity if the buyer exercises
Which of the following best describes hedging?
Taking an opposite position in futures to your position in the underlying asset
There are three market participants for a particular futures contract, Angie, John and Jake. At the end of the day of trading in the futures market, there are no more open positions, i.e. everyone has closed out. If Angie and John have a total loss of £3000, what profit/loss does Jake have?
Profit of £3000
Which of the following choices are available to the writer of a traded option?
To trade out the option by closing their position
Keep the premium if the option is not exercised
Which of the below represents a buy side firm?
Hedge funds
