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