Part 2 Unit 16

Question 1

Option contracts

Answer 1

Offer investors a means to protect an invst. value or speculation.

-Option establishes a price and time frame for purchase or sale of underlying instrument.

-One receives the right to buy or sell
-The other is obligated to fulfill.

Standard options:
1. Underlying assets (Option on XYZ equals to 100 shares of XYZ company)
2. Expiration date (all expire in June or whatever month have the same date and time of expiry
3. Exercise or strike prices are set at standardized intervals

THe longer the time to expire, the greater the time value so affecting prices.

Question 2

Forward/future contracts

Answer 2

Value based on non-security assets like commodities.

Question 3

Option cost?

Answer 3

Premiums quoted in dollars per share

Question 4

How many transactions are available to option investor?

Answer 4

1. Buy calls
2. Sell calls
3. Buy puts
4. Sell puts

Option buyers are long the positions, and option sellers are short positions

Question 5

Rights offering:

Answer 5

Have an exercise price slightly lower than the market price.
45-60 days for current owners to make up their mind.
They are given to existing holders of the common stock
Price below market so if you don’t want, you sell them for profit
Short life span
They can be left to expire but unwise thing to do

Question 6

Warrants

Answer 6

Exercise price above current price
no relationship to existing shareholders proportionate interest.
Long expiration; as much as 10 years
with bond: sweetens the issue, allowing for lower interest on bond
with equity; a unit; such as a one share of stock with a warrant to purchase another share

Unlike call options, warrants have a long expiration as are issued by the issuer not the exchange.