Midterm 2

Question 1

Call Option

Question 2

Strike Price / Exercise Price

Question 3

Put Option

Question 4

Real Options

Answer 4

Real investments tend to have embeded options

-abandon sour investments
-expand good investments

Question 5

Holder

Answer 5

Buyer of option

-paid a premium
-has the right to decide whether to call or put

Question 6

Writer

Answer 6

Seller of option

-received the premium
-has no choice if the option is exercised

Question 7

Call Holder

Answer 7

Bought the right to buy

Question 8

Call writer

Answer 8

sold the right to buy

Question 9

Put writer

Answer 9

Sold the right to sell

Question 10

Put holder

Answer 10

Bought the right to sell

Question 11

Long underlying

Question 12

Short underlying

Question 13

Long Call

Question 14

Short call

Question 15

Long Put

Question 16

Short Put

Question 17

If the underlying is more volatile, what happens to the value of the option?

Answer 17

It increases

Question 18

OTC vs Exchange traded options
-specs
-security (collateral)
-counter-party risk
-liquidity risk

Question 19

Open Interest

Answer 19

The number of contracts outstanding

-when two parties enter the two sides of an option, a contract is created (+1 Open Interest)

-If one party closes and another party takes over the position, the OI remains the same

-When two parties close both sides of a contract (-1 Open Interest)

Question 20

In the Money

Answer 20

option holder likely to exercise

Question 21

At the Money

Answer 21

option holder may or may not exercise

Question 22

Out of the money

Answer 22

option is not likely to be exercised

Question 23

Covered Call

Question 24

Protective Put

Question 25

Spread

Question 26

Vertical Spread

Question 27

Horizontal Spread

Question 28

Diagonal Spread

Question 29

Combinations

Question 30

Straddle

Question 31

Strangle

Question 32

Option Class

Answer 32

Call or Put

Question 33

Option Series

Answer 33

All options of a given class with the same expiration date and strike price