Unit 4: Types and Characteristics of Derivatives

Question 1

Buying a straddle likes

Answer 1

volatility

Question 2

Selling a straddle likes

Answer 2

stability

Question 3

Preemptive rights

Answer 3

Existing common stock holders have the right to purchase shares in an upcoming offering up to the amount that maintains their current ownership percentage
-these rights can be sold/trade; very short term (45-60 days)

Question 4

Warrants

Answer 4

-long term instrument
-priced above current market value
-can be offered with bond or stock issue

Question 5

Forward Contracts

Answer 5

Parts of the contract:
-Quality
-Quantity
-Time, Price, and Place of delivery

Question 6

Futures

Answer 6

-Exchange Traded
-Obligations only occur if exercised
-Typically used by speculators
-Clearing firm involved, no counterparty risk
-Used by growers and producers.

Question 7

Growers hedge with

Answer 7

selling futures

Question 8

Producers hedge with

Answer 8

buying futures

Question 9

Bonds issued with warrants can lower

Answer 9

interest cost

Question 10

Warrants value

Answer 10

Time value, not intrinsic value since they are issued above current market price

Question 11

Forward contract traits

Answer 11

-illiquid
-customized
-counterparty risk
-used as hedge
-not regulated

Question 12

Futures contract traits

Answer 12

-standardized
-regulated
-has floor brokers
-actively traded
-daily settlement
-uniform amounts
-for speculation