Lesson 9

Question 1

stock option

Answer 1

to buy or sell shares of an underlying stock at a set price on or before a set date

Question 2

you can buy and sell options contracts on…

Answer 2

regular stocks, indexes, ETFs, futures contracts

Question 3

call option

Answer 3

gives the holder the right, but not the obligation, to buy a specified number of shares of stock at a stated price within a specified period

Question 4

put option

Answer 4

an option that gives the holder the right, but not the obligation, to SELL a specified number of shares of stock at a stated price within a specified period

Question 5

ask

Answer 5

the lowest price one is willing to receive for an options contract

Question 6

bid

Answer 6

the highest price one is willing to pay for an options contract

Question 7

LEAPs

Answer 7

long-term options: options on individual stocks with maturities greater than one year

Question 8

Canadian Derivatives Clearing Corporation

Answer 8

CDCC; the clearing corporation that issues and guarantees all equity, bond, an stock index positions on option exchanges in Canada

Question 9

futures contract

Answer 9

agreement providing for the future exchange of a particular asset between buyer and seller at a specified date for a specified amount

Question 10

short position (seller)

Answer 10

an agreement to sell an asset at a specified future date at a specified price

Question 11

long position (buyer)

Answer 11

an agreement to purchase an asset at a specified future date at a specified price

Question 12

offset

Answer 12

liquidation of a futures position by an offsetting transaction - buyers sell their positions and sellers buy their positions prior to the settlement of the contract (delivery)

Question 13

futures margin

Answer 13

the good faith (Earnest money) deposit made by the buyer or seller to ensure the completion of a contract

Question 14

zero-sum game

Answer 14

in reference to futures trading - the aggregate profits enjoyed by the winners must be equal to the aggregate losses suffered by the losers; gains and losses net to zero; buyer and seller gains/costs must be equal; the net exposure to changes in the commodity’s price must be zero

Question 15

marked to the market

Answer 15

all profits and losses on a contract are credited and debited to each investor’s account every trading day

Question 16

short (sell) hedge

Answer 16

a transaction involving the sale of futures (a short position) while holding the asset ( a long position)

Question 17

long (buy) hedge

Answer 17

a transaction where the asset is currently not held but futures are purchased to lock in current prices

Question 18

basis risk

Answer 18

the risk that hedgers face as a result of unexpected changes in basis (basis = cash price - futures price); the basis must be zero on the maturity date of the contract

Question 19

financial derivative securities

Answer 19

derive all or part of their value from another (underlying) security

Question 20

exercise (strike) price

Answer 20

the per-share price at which the common stock may be purchased or sold

Question 21

expiration date

Answer 21

last date at which an option can be exercised (America: on and up to the expiration date, European: only ON the expiration date)

Question 22

option premium

Answer 22

the price paid by the option buyer to the writer of the option, whether put or call

Question 23

covered

Answer 23

put terminology; when a seller currently owns the share it is selling a Put option on

Question 24

naked

Answer 24

when a seller DOES NOT currently own the shares they are selling a Put option on

Question 25

right

Answer 25

to purchase a stated number of of common shares at a specified price within a specified time (usually a few weeks to a few months)

Question 26

warrant

Answer 26

to purchase a stated number of common shares at a specified price with a specified time (often several years)

Question 27

hedgers

Answer 27

buy/sell futures to offset risk; willing to forgo profit for reduced risk

Question 28

speculators

Answer 28

buy/sell futures to gain a return

Question 29

clearing houses/corps

Answer 29

corp separate from but associated w/ each exchange; exchange members must pay membership for these services; buyers and sellers settle with CORP, not with EACH OTHER ; helps maintain an orderly market and keeps obligations accountable