Unit 5

Question 1

When the price is expected to stay flat, selling an option is a way

Answer 1

make some profit

Question 2

When contrasting call options, preemptive rights, and warrants, it would be correct to state

Answer 2

only preemptive rights and warrants are issued by the underlying corporation. Call options are through OCC

All 3 trade on exchanges

Question 3

When contrasting preemptive rights and warrants

Answer 3

rights have intrinsic and time value while warrants only have time value

preemptive rights always offer the stock at a price below the current market, thus creating intrinsic value. Although rights rarely are effective for longer than 45–60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.

Question 4

Your client who owns a DPP that generated a $10,000 passive loss for the year could

Answer 4

only deduct passive loss against passive income

Question 5

In order to achieve its goals, an inverse ETF uses

Answer 5

derivatives and debt.