Principles of Exchange-Traded Derivatives Flashcards
In a screen-based market, the exchange has a responsibility to provide prices to which of the following people?
The public
if interest rate rose, what is likely affect on equity option premiums
call prices rise and put prices fall
if an investor wanted to arbitrage a future’s price, take into account
The time to delivery of the future
Interest rates (financing costs)
The future’s price
The price of the underlying asset today (the cash price)
Which of the following would you normally expect to be negative?
Put option deltas
In June, a farmer is concerned about falling wheat prices and takes out a hedge by selling a December wheat contract. His wheat is ready for sale in November and he lifts the hedge by selling the wheat in the cash market and closing-out his futures contract.
From which of the following is the farmer at risk?
A change in basis from June to November
Which of the following best describes a contango market?
Near month priced below far month
when is gearing highest for an option?
when it is out of the money
fair value of a future
the cost of buying the asset in the cash markets and holding it to the delivery date of the date
If interest rates increase, what is the effect on the cost-of-carry element of the fair value of a future?
the cost of carry increases
Basis
Basis is calculated by deducting the future’s price from the cash price
An order to buy 25 long gilt contracts at £103.00, or lower, if the market was currently at £103.10 would be called:
a limit order
out of the money option
a put option with a strike price below the current price of the underlying security
You have calculated the fair value of a future contract to be 803. The contract is currently trading at 800. What should a risk-averse investor do to make money?
sell the cash and buy the future
According put-call parity, what would be the best course of action if the put was over valued in comparison to the call?
buy the call, sell the put and sell the cash
Delta
the change in the value of the premium / change in the value of the underlying.
The significance of the arbitrage channel is:
That transaction costs outweigh the profit from an arbitrage transaction within this range
A speculator is short four futures on an asset. In addition, he is long three deeply in-the-money put options on the same underlying. What is his net position?
Short seven
When calculating the fair value of a Standard and Poor index future, you find the value to be 903. In comparison the future is trading at 900. Which one of the following trades would you perform to take advantage of the price difference?
Reverse cash and carry
If an investor thinks the market price of an asset is going to rise, the most appropriate action would be:
To buy an out-of-the-money call
Which of the following should be included when calculating the cost of carry on a future for a share?
Dividend entitlement
The value of a futures contract is driven by:
the cash price of the underlying
Delta
in the money calls have higher deltas that at the money calls
Stop limit order
an order which will close out a clients position within a specified price range
If a trade is entered into the automated trading system without a specified expiry, for how long will the order be valid?
until the end of the trading day
The delta of a deeply in the money short call is
close to -1
If an investor is long a deeply in the money call option, the delta and gamma are respectively closest to
+1 and 0
What would not be taken into consideration when deciding the order of the execution on the exchange?
the security
Per put-call parity, which of the following combinations creates a synthetic short call?
Short asset and short put
Where basis moves towards zero as the contract approaches delivery
Have intrinsic value
Which of the following best describes convergence in a futures contract?
Where basis moves towards zero as the contract approaches delivery
Fair value
Fair value = cash/spot price + net cost-of-carry
A trader sells a futures contract. In order to complete a basis trade, which of the following actions is required?
buy the underlying
On an open outcry market, who has the responsibility of price reporting?
An exchange official
Which of the following would be out-of-the money options?
A call option where the price of the underlying is below the exercise price
A put option where the price of the underlying is above the exercise price
If a future is trading below fair value, which of the following trades will an arbitrageur enter into in order to make a profit?
Buy futures and sell the underlying
Delta
Delta = change in the option’s premium / change in the underlying price
Which of the following is not an option ‘Greek’?
Beta
The rate of change of Delta for a given change in the price of the underlying is called:
gamma
gamma
is negative for short options
In what state would the market be if there was adequate supply and storage?
contango
Time value
is nil at expiration
An option premium is made up of the intrinsic value (profit if exercised now)
and the time value.
If a future was trading BELOW its fair value, what would you expect a futures trader to do?
reverse cash and carry arbitrage
When considering the relationship between the price of an underlying asset and the price of the future on that asset, which of the following best describes how basis changes?
Non-linear
Intrinsic value for a put
Intrinsic value for a put = exercise price - underlying share price:
Which of the following investors would benefit most from the passing of time?
Option writers
An investor is long two futures and short two ATM calls with deltas of 0.5. What is the investor’s cumulative position?
Long one
What should be included in the calculation of an index future’s fair value?
Interest payments
Which of the following best describes a contango market?
Near month priced below far month
An option has a premium of 9, intrinsic value of 7 and the underlying is at 20. Which of the following is true?
It is in the money
Which of the following would impact upon the price of an option?
Time to expiry
Market sentiment
Market depth
Volatility of the underlying securit
An equity index future with a distant delivery date will have a higher fair value than that of a near-dated one if:
The dividend yield is lower than present interest rates
The rate of change of delta (assuming long positions) for a given change in the underlying is:
Positive for calls, positive for puts
An option position containing an at-the-money long-put and an at-the-money long-call on the same underlying instrument would have a Delta that is most likely:
Roughly zero
What happens to the premium on an at-the-money put option if the price of the underlying rises?
Decrease
Which is true of a contango market?
Nearby prices are at a discount to forward prices
An option’s Delta is best described as the ratio between:
The change in the option premium and the change in the price of the underlying instrument
An investor who sells the expensive contract and takes an offsetting position in the cash market is undertaking which of the following trades?
Cash/Futures arbitrage
Which of the following best describes a back market?
A market where the cash price is greater than the far price
When trading on an order driven sytem, MIT stands for which of the following?
Market-if-touched
In a backwardation market, which of the following occurs?
Nearby prices are higher than forward prices
If interest rates exceed dividend receipts, one would expect FTSE 100 futures prices to be:
Higher than the current FTSE 100 index
If the future’s price is trading above its fair value, which of the following trades is most likely to take advantage of this discrepancy?
Cash and carry
The option with the lowest gamma would be:
Deeply in-the-money put
A speculator seeks to go long at a level in the market below the prevailing level. Which of the following orders should she give her broker?
A buy MIT
Which of the following best describes cash and carry?
Buy cash and sell forward
According to put-call parity theory, if you are long a call and short a put with the same strike this is equivalent to a:
Long-futures position
A put option, where the exercise price is lower than the underlying’s current value, is said to be:
Out-of-the-money
If everything else remained constant, increases in which of the following is likely to increase option premiums?
Volatility
Remaining life
If an investor expects the basis to strengthen, he thinks that:
Basis will become more positive: buy the cash and sell the future
If an option has intrinsic value (calls and puts)
then it must be in-the-money.
A market where near-dated prices are lower than far-dated prices is called:
Contango
Which of the following reasons BEST explains why a manager would monitor the delta of his portfolio?
To maintain a delta neutral position
Time value is greatest for which of the following options if the underlying asset is priced at 115 in April 2020?
November 2020 160 call
Which of the following options would have the highest delta?
A far-dated deeply in the money put
In which of the following would Gamma be greatest?
An ATM option with three months to expiry
A future is priced at 110, the 100 strike call option on the future is trading at 12, and the 100 strike put option on the future is trading at 9. What would be the best trade to execute to take advantage of this mispricing?
Reversal
A wheat farmer fears falling prices will affect the return from his harvest, so he enters into a short futures contract on exchange to reduce his risk. At harvest, the farmer sells his wheat and closes out his futures position. What risk is he exposed to?
Basis risk
Which of the following is the change of the premium of an option with respect to changes in the underlying?
Delta
Which of the following would not influence the cost-of-carry?
Market sentiment
If interest rates increase, what is the effect on the cost of carry element of the fair value of a future?
The cost of carry increases
All of the following are the main components of cost-of-carry, except:
Supply and demand
An investor has a long position in an asset and is concerned about the market falling. He would like to enter an order to close out his position if the market reaches a certain point, but he is willing to sell above a specified price, but not below. Which order is best for the investor?
Stop limit order
If the fair value of a future is at a discount to the future’s price, which of the following would generate profit?
Cash and carry
Time value
Time value = premium - intrinsic value.
How would a hedger attempt to eliminate basis risk?
Hold the derivative investment to expiry
Exchange price feeds provide:
Streaming prices
What might you use to determine implied volatility?
Pricing models
