Investments Ch 3

Question 1

A financial instrument whose value is based on an underlying asset (such as a stock) or a group of assets (such as a benchmark)

Answer 1

Derivative

Question 2

The minimum price an option will command. Is the difference between the market price of the underlying asset and the exercise price of the option.

Answer 2

Intrinsic value

Question 3

The amount by which the market price of an option exceeds its intrinsic value

Answer 3

Time premium

Question 4

The price at which the stock can be purchased or sold on exercise of the option.

Answer 4

Exercise Price/strike Price

Question 5

The market price (cost) of an option

Answer 5

Premium

Question 6

As the option approaches its expiration date, the market price of the option (premium) approaches its _________

Answer 6

Intrinsic value

Question 7

A contract that gives the Holder the right to sell a specific number of shares of common stock and a set price for a given period of time until the contract expires.

Answer 7

Put

Question 8

Intrinsic value of a put equals exercise Price minus ____ price

Answer 8

Market

Question 9

When the market price is______ the exercise Price, a put is in the money.

Answer 9

Less than

Question 10

When the market price is greater than the exercise price, a put is______

Answer 10

Out of the money

Question 11

One option involves rights or obligations relative to ______ shares.

Answer 11

100

Question 12

A ______ is a contract that gives the Holder the right to Purchase a specific number of shares of common stock at a set price for a given period of time.

Answer 12

Call

Question 13

Investors buy calls when they are _______.

Answer 13

Optimistic or bullish

Question 14

Call writers or sellers seek _______.

Answer 14

Premium income

Question 15

If an individual writes a ________, the call is written on stock already owned by the call writer.

Answer 15

covered call

Question 16

Call writers are ____________. They believe the stock will not increase in value, and therefore, the options will not be exercised.

Answer 16

Pessimistic (bearish)

Question 17

The selling of a call without owning the stock is called _________.

Answer 17

naked call writing.

The writer seeks premium income.

Question 18

Intrinsic value of a call = Market Price - ________.

Answer 18

Exercise Price of the underlying stock.

Question 19

When the market price is _________ the exercise price, the call is in the money.

Answer 19

greater than

Question 20

When the market price is ________ the exercise price, the call is out of the money.

Answer 20

less than

Question 21

What is the riskiest option position?

Answer 21

Selling a naked call

If the price of the stock rises, the seller of the option is forced to buy the stock at the higher market price in order to supply it to the option buyer. This is the riskiest option because the stock may rise without limit.

Question 22

As the time to expiration diminishes and the option approaches expiration, its value __________.

Answer 22

Declines

Question 23

Call Option Taxation (9 months or less)

At the time of purchase, the premium paid is a _____________.

When exercised, the premium is _______ in the basis of the stock.

Answer 23

nondeductible capital expenditure

included

Question 24

Taxation for the call writer

1. If the option lapses, the premium received is a ___________.
2. If the option is exercised (covered call), the premium received is added to the __________.

Answer 24

short-term gain

sale price
(can be a long-term gain if the underlying security was held more than 12 months. Otherwise, it’s a short-term gain.)

Question 25

Taxation for the call holder

If the option is not exercised, then the option is considered sold (it expires) and produces a short-term _______.

Answer 25

Loss

Question 26

When a PUT option lapses, the premium received by the writer is ______.

Answer 26

short-term gain

Question 27

These long-term options have maturities ranging up to 2 years and beyond. They allow options buyers to assume positions for anticipated long-term market movements.

Answer 27

Long-Term Equity Anticipation Securities

Question 28

An agreement between a buyer and a seller through a commodity exchange for the future delivery of a commodity at a specified date for a specified price.

Answer 28

Futures contract

Question 29

FUTURES CONTRACT

_______ means settlement.

_______ means buyers sell their positions and seller buy their positions sometime prior to delivery.

Answer 29

Delivery (for example, delivery of pork bellies)

Offset

Question 30

The current market price of commodity in the Cash market

Answer 30

Spot price

Question 31

The number of future contracts trading for particular commodity on any given day

Answer 31

Open interest

Question 32

Future contract

The maximum permissible price increase or decrease relative to the settlement price on the previous day

Answer 32

Daily limit

Question 33

The three main types of futures contracts

Answer 33

Commodity futures
Financial futures
Foreign currency futures

Question 34

FUTURES CONTRACT

A _______ position is held by the party who wants to buy the commodity / financial.

A ______ position is held by the party who wants to sell the commodity /financial.

Answer 34

long (bullish)

short (bearish)

Question 35

DIFFERENCES BETWEEN CALLS AND WARRANTS

________ are issued by corporations whereas ______ are created by individuals on exchanges.

_______ typically have maturities of at least several years whereas listed _____ generally expire within 9 months.

_____ are standardized where as ________ are not.

Warrants are issued with _______ intrinsic value.

Answer 35

Warrants / calls

Warrants / calls

Call options / Warrant terms

No

Question 36

An accredited investor is defined as an individual with a net worth of ______, one individual with an annual income of _____________, or a couple with a joint income of ____________.

Answer 36

$1,000,000 / $200,000 / $300,000

Remember the 1-2-3 test.

Question 37

If an issue is offered privately, it is not considered to be a public offering and is exempt from formal registration. The offering can be sold to a maximum of ______ non-accredited investors and ________of accredited investors.

Answer 37

35 / an unlimited number

Question 38

Futures contracts are not _______. They are regulated by the Commodity Futures Trading Commission and not by the SEC.

Answer 38

Securities

Question 39

Total risk is expressed by __________ while systematic risk is expressed by _______.

Answer 39

standard deviation / beta

Question 40

The combination of systematic and unsystematic risk that an investment or portfolio presents

Answer 40

Total risk (portfolio risk)

Question 41

Unsystematic risk can be reduced through _________ by owning securities of companies in different industries with ________ or ______ or ________ correlations.

Answer 41

low positive, zero, negative

Question 42

Systematic risk _______ be minimized by owning more securities.

Answer 42

cannot

Question 43

Conventional wisdom indicates that _____ stocks in differing industries will greatly reduce unsystematic risk.

Answer 43

15

Question 44

The risk that a foreign government will default on its loan or fail to honor business commitments because of a change in national policy.

Answer 44

Political risk

Question 45

A volatile stock is ______ attractive to a speculator than an option whose price tends to be stable.

Answer 45

MORE.