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Derivatives > Trading, Hedging and Investment Strategies > Flashcards

Trading, Hedging and Investment Strategies Flashcards

1
Q

Which of the following best describes the maximum profit available to the holder of a bull call spread?

A

The difference between the two strikes minus the net initial premium

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2
Q

Which of the following would be a motivation for undertaking a covered short call?

A

Prices will remain stable

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3
Q

How would an investor maximise return in the UK equity market if no change in the market is expected?

A

Sell calls and sell puts

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4
Q

Which of the following would be an example of an intermarket interest rate spread trade?

A

Buy June STIR, sell June Euribor future

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5
Q

Which of the following is an example of an intra-market spread?

A

Long September lead futures contract, short a December lead futures contract

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6
Q

Simon is short JGB futures. Which of the following is true?

A

Simon believes that Japanese interest rates will rise

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7
Q

Which one of the following would create a synthetic equity fund in combination with a holding of a cash deposit?

A

Long-future

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8
Q

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)?

A

Buying puts

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9
Q

A synthetic long call is created by:

A

Long a future, long a put

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10
Q

An investor believes that the price of a share will stay at 240 between now and the expiry date. What strategy should he adopt to get the most profit available?

A

Short-straddle

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11
Q

An investor expects that the eurozone yield curve would rotate and flatten at the long-end.
What spread trade would make sense in this situation?

A

Sell the euribor future and buy the bund future

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12
Q

Long-future + long-put =

A

Synthetic long-call

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13
Q

An investor wishing to undertake a long-strangle would do which of the following trades?

A

Buy a put and a call with different strikes, but the same expiry month

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14
Q

A futures intra-market spread order is best described as:

A

An order to buy the near-dated future and sell the far-dated future for the same contract

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15
Q

Which of the following spreads would be best used in anticipation of a major announcement by a commodity producer?

A

Horizontal spread

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16
Q

Which of the following investments would create a diagonal spread?

A

An investor buys a call option and simultaneously sells another call option with a different strike and different expiry

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17
Q

An option credit spread is:

A

Purchase and sale of a different strike and same expiry put options. This will cause a net initial credit.

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18
Q

Which of the following would constitute a speculative trade with the most directional bias?

A

An investor writes a naked call option without having a underlying position in the asset

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19
Q

Which of the following best describes the formula for hedging a holding of the cheapest-to-deliver (CTD) bond using gilt futures?

A

(nominal value of CTD/face value of future) x pricing factor

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20
Q

An investor holds a position long in the underlying and also owns a put on that underlying. How could she eliminate market risk?

A

Synthetic short call

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21
Q

Option spreads must

A

(1) contain either two calls or two puts, and (2) consist of a purchase of one and a sale of the other.

22
Q

An investor that simultaneously holds a call and sells a put with the same contract specifications. Their position could be described as a:

A

Long position

23
Q

Long-strangle

A
  • buy call and put - different strikes.
24
Q

Short-strangle

A

sell call and put - different strikes.

25
Q

Short-straddle

A

sell call and put - same strike.

26
Q

Long-straddle

A

buy call and put - same strike.

27
Q

Which of the following is true of a synthetic index fund?

A

It contains both cash and futures

28
Q

An options portfolio contains a January short-call, strike 200, and an April long-call, strike 220, on the same underlying asset. The strategy could be best described as:

A

Diagonal spread

29
Q

Which of the following pairs of investments could an investor engage in to create a synthetic long-call?

A

Buy in the cash market, buy a put

30
Q

A futures trader expects a bull market in the FTSE 100 index. The bull market is likely to lead to the spread widening. Which of the following would you normally expect the trader to do?

A

Sell the near-month and buy the far-month

31
Q

Which of the following BEST represents the benefits of a covered short call position?

A

Extra return in a stable market and some protection from a falling market

32
Q

Which of the following would be the main motivation for doing a covered short call?

A

Price expected to remain stable

33
Q

Where would a unit trust manager set out the objectives and strategies in relation to derivatives?

A

Trust deed

34
Q

Which of the following investors is most likely to take on the most risk in their derivative investments?

A

Hedge funds

35
Q

An investor who buys a call with a higher strike and sells a call with a lower strike has created which of the following positions?

A

A bear call spread

36
Q

A wool producer believes that the market price for wool will fall slightly, which of the following would be a suitable strategy?

A

Write calls

37
Q

If interest rates fall,

A

the price of the long gilt future will increase

38
Q

A reduction in interest rates

A

will reduce the cost-of-carry and therefore reduce the spread

39
Q

If an investor expects the Japanese interest rates to rise faster than the Euro rates which spread transaction should he undertake?

A

Sell the Japanese government bond future, buy the German government bond future

40
Q

An investor holding equities believes share prices will rise but wants protection in case the market falls. What is the most suitable option position?

A

Purchase a put option

41
Q

sovereign wealth fund

A

Pool of money derived from a country’s reserves which are set aside for investment purposes.

42
Q

You expect Japanese interest rates to rise faster than European rates. Which of the following would be the most appropriate spread trade?

A

Sell JGB futures and buy bund futures

43
Q

A spread trader who is long a December coffee future and short a March coffee future has established which of the following?

A

An intra-market spread

44
Q

bearish view.

A

Buying the high strike option and selling the low strike option

45
Q

The spread is

A

the difference between the prices of the futures

46
Q

A bear spread

A

involves selling the lower strike option (either put or call).

47
Q

A bull spread involves

A

buying the lower strike option (either put or call)

BULL BUY LOW..

48
Q

A synthetic long call is created by going:

A

Long a future, long a put

49
Q

An investor buys a put and simultaneously sells a put with a higher strike price. What strategy have they entered into?

A

Bull put spread

50
Q

A synthetic long future is created by:

A

Combining a short-put and a long-call

51
Q

Selling futures against the delivery of the underlying asset such as cocoa is which type of strategy?

A

Hedging

52
Q

The best description of gearing in the context of derivatives is:

A

The cost of the derivative as a percentage of the return on the investment

Derivatives (15 decks)

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