Trading, Hedging and Investment Strategies Flashcards
A trader wants to hedge £14m of FTSE 100 stocks using index options. The index is currently at 5,100 points and a put option with a strike of 5,000 is available. How many contracts are required if the contract is valued at £5 per half index point?
A275 B280 C2,750 D2,800
280,
£14m/(5,000 x £10) = 280 contracts.
A trader buys a June 94 strike T-bond put and simultaneously sells a June 90 strike T-bond put. This is known as a:
ABull put spread BCalendar spread CBear call spread DBear put spread
Bear put spread,
Buying the high strike option and selling the low strike option is a bearish view.
George is uncertain over the direction of interest rates but wants to hedge against an increase in the borrowing rate on a loan he took out three months ago. Which of the following is the most suitable position to adopt (using options on interest rate futures)?
ABuy futures BBuy calls CBuying puts DWrite calls
Buying puts,
As interest rates increase, the price of interest rate futures goes down. In other words there is an inverse relationship between the interest rates and the price of interest rate futures. It therefore follows that the value of put options (they are priced like the futures) on interest rates would go up as interest rates increase and this would act as a hedge in this example.
Which of the following BEST represents the benefits of a covered short call position?
AExtra return in a stable market and some protection from a rising market BExtra return in a stable market and some protection from a falling market CProtection from a falling market at the expense of limited profits in a rising market DProtection from a rising market at the expense of limited profits in a falling market
Extra return in a stable market and some protection from a falling market ,
A covered short call is a trade performed by an investor in an asset. They hold the asset, but believe the return will be low, due to a static market. If the investor sells an OTM call on this, they generate extra income. If the market remains static, this creates a yield enhancement. If the market falls a little, this strategy gives a little downside protection.
Which of the following trades in the same UK equity option is a spread?
ABuy a September 390 call and buy a March 390 call BBuy a November 320 call and sell a February 360 call CSell a February 300 call and sell a May 330 put DBuy a September 460 put and sell a March 500 call
Buy a November 320 call and sell a February 360 call,
Option spreads must (1) contain either two calls or two puts, and (2) consist of a purchase of one and a sale of the other.
You have sold ten single stock futures for a UK company for 800p. You closed-out the position at 780p. What is your profit or loss, assuming a contract size of 1,000 shares?
A£200 profit B£2,000 profit C£200 loss D£2,000 loss
£2,000 profit,
Profit per contract is the difference between the buying and the selling price, which is £0.20. The contract size is 1,000 for UK shares and we have 10 contracts, so 0.20 x 10 x 1,000 = £2,000 profit.
Simon is short JGB futures. Which of the following is true?
ASimon believes that yen will strengthen BThe contract will be physically settled by delivery CSimon believes that Japanese interest rates will fall DSimon believes that Japanese interest rates will rise
Simon believes that Japanese interest rates will rise,
If interest rates rise the price of the bonds and their derivatives will fall.
If Simon is short, he expects the price of the JGB future to fall.
A trader holds a straddle with strike prices set at 740. The underlying is at 765. What is the intrinsic value?
A0 B25 C(25) D50
25,
There is no such thing as negative intrinsic value on a put option. The call option is in-the-money by 25p.
An investor makes a purchase of a 330 call at a premium of 4p. He simultaneously sells a 300 call at 15p. What is the investor’s maximum loss?
A4p B11p C15p D19p
19p,
This is bear call spread. Remember BULL BUY LOW strike call or put - therefore as the low strike call has been sold this is a bear call spread.
As the investor has received income up front this represents a net credit of 11p. The maximum loss on a net credit spread is the difference between the strikes minus the net credit - so 30p-11p = 19p
