Trading, Hedging and Investment Strategies Flashcards
Which of the following best describes the maximum profit available to the holder of a bull call spread?
The difference between the two strikes minus the net initial premium
Which of the following would be a motivation for undertaking a covered short call?
Prices will remain stable
How would an investor maximise return in the UK equity market if no change in the market is expected?
Sell calls and sell puts
Which of the following would be an example of an intermarket interest rate spread trade?
Buy June STIR, sell June Euribor future
Which of the following is an example of an intra-market spread?
Long September lead futures contract, short a December lead futures contract
Simon is short JGB futures. Which of the following is true?
Simon believes that Japanese interest rates will rise
Which one of the following would create a synthetic equity fund in combination with a holding of a cash deposit?
Long-future
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)?
Buying puts
A synthetic long call is created by:
Long a future, long a put
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?
Short-straddle
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?
Sell the euribor future and buy the bund future
Long-future + long-put =
Synthetic long-call
An investor wishing to undertake a long-strangle would do which of the following trades?
Buy a put and a call with different strikes, but the same expiry month
A futures intra-market spread order is best described as:
An order to buy the near-dated future and sell the far-dated future for the same contract
Which of the following spreads would be best used in anticipation of a major announcement by a commodity producer?
Horizontal spread
Which of the following investments would create a diagonal spread?
An investor buys a call option and simultaneously sells another call option with a different strike and different expiry
An option credit spread is:
Purchase and sale of a different strike and same expiry put options. This will cause a net initial credit.
Which of the following would constitute a speculative trade with the most directional bias?
An investor writes a naked call option without having a underlying position in the asset
Which of the following best describes the formula for hedging a holding of the cheapest-to-deliver (CTD) bond using gilt futures?
(nominal value of CTD/face value of future) x pricing factor
An investor holds a position long in the underlying and also owns a put on that underlying. How could she eliminate market risk?
Synthetic short 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.
An investor that simultaneously holds a call and sells a put with the same contract specifications. Their position could be described as a:
Long position
Long-strangle
- buy call and put - different strikes.
Short-strangle
sell call and put - different strikes.
Short-straddle
sell call and put - same strike.
Long-straddle
buy call and put - same strike.
Which of the following is true of a synthetic index fund?
It contains both cash and futures
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:
Diagonal spread
Which of the following pairs of investments could an investor engage in to create a synthetic long-call?
Buy in the cash market, buy a put
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?
Sell the near-month and buy the far-month
Which of the following BEST represents the benefits of a covered short call position?
Extra return in a stable market and some protection from a falling market
Which of the following would be the main motivation for doing a covered short call?
Price expected to remain stable
Where would a unit trust manager set out the objectives and strategies in relation to derivatives?
Trust deed
Which of the following investors is most likely to take on the most risk in their derivative investments?
Hedge funds
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 bear call spread
A wool producer believes that the market price for wool will fall slightly, which of the following would be a suitable strategy?
Write calls
If interest rates fall,
the price of the long gilt future will increase
A reduction in interest rates
will reduce the cost-of-carry and therefore reduce the spread
If an investor expects the Japanese interest rates to rise faster than the Euro rates which spread transaction should he undertake?
Sell the Japanese government bond future, buy the German government bond future
An investor holding equities believes share prices will rise but wants protection in case the market falls. What is the most suitable option position?
Purchase a put option
sovereign wealth fund
Pool of money derived from a country’s reserves which are set aside for investment purposes.
You expect Japanese interest rates to rise faster than European rates. Which of the following would be the most appropriate spread trade?
Sell JGB futures and buy bund futures
A spread trader who is long a December coffee future and short a March coffee future has established which of the following?
An intra-market spread
bearish view.
Buying the high strike option and selling the low strike option
The spread is
the difference between the prices of the futures
A bear spread
involves selling the lower strike option (either put or call).
A bull spread involves
buying the lower strike option (either put or call)
BULL BUY LOW..
A synthetic long call is created by going:
Long a future, long a put
An investor buys a put and simultaneously sells a put with a higher strike price. What strategy have they entered into?
Bull put spread
A synthetic long future is created by:
Combining a short-put and a long-call
Selling futures against the delivery of the underlying asset such as cocoa is which type of strategy?
Hedging
The best description of gearing in the context of derivatives is:
The cost of the derivative as a percentage of the return on the investment
