Which of the following is NOT considered to be a derivative? A. Warrant The best answer is B. A
derivative security has a value that is "derived" from another investment, but it is not a directly proportional piece of an investment, which is the case with an investment company product such as a unit investment trust. Options are derivative because their premium movement (price) is based on the price movements of the underlying security. A warrant is a long-term issuer created call option that can be attached to stock and bond offerings to make them more attractive. A credit default
swap (CDS) is a contract where the holder of a debt instrument makes a series of payments to a seller in return for a payoff if the credit quality of the issue deteriorates below a stated level. Thus, the contract becomes more valuable as an issuer's credit quality declines, since the seller is then obligated to make the payoff. CDSs are issued and traded OTC - there is no listed exchange for these. A customer would buy call contracts because: A. the customer is bullish on the underlying security The best answer is A. Call contracts are bought when a customer is
bullish on the market. The writer of a call on a listed stock is exercised. The writer MUST: I deliver stock A. I and III The best answer
is B. If the writer of a call option on listed stocks is exercised, he must deliver 100 shares of stock, for which the writer will receive the strike price in cash. A customer who is long put contracts would have what kind of market sentiment? A. Bullish The best answer is B. Put contracts are bought when a customer is bearish on the market. A customer would buy put contracts because: A. the customer is bullish on the underlying security The best answer is B. Put contracts are purchased when a customer is bearish on the market. If the market falls, the puts go "in the money" and the holder would exercise, selling the stock for the strike price that is higher than the current market price. The maximum potential gain for the holder of a put will occur if the price falls to
"0". Gains and losses on options transactions are treated as capital gain or loss for income tax purposes. It is not ordinary income, making Choice D incorrect. If the writer of an equity put contract is exercised, the writer MUST: A. deliver cash in 1 business day The best answer is C. If the writer of an equity put contract is exercised, he is obligated to buy the stock at the strike price (paying cash) from the holder of the put. Settlement is 3 business days after exercise date - this is a regular way stock trade. The purchase of a call is a: A. bull strategy The best answer is A. The buyer of a call has the right to buy stock at a fixed price in a rising market. The buyer has unlimited gain potential as the market rises, so this is a bull market strategy. In November, a customer buys 1 ABC Jan 75 Call @ $6 when the market price of ABC is 73. The customer's maximum potential gain is: A. $600 The best answer is D. The holder of a call has unlimited gain potential. He has the right to buy stock at a fixed price - and the stock can rise an unlimited amount. In January, a customer buys 1 ABC Jun 80 Call @ $7 when the market price of ABC is 81. The customer's maximum potential gain is: A. $700 The best answer is D. The holder of a call has unlimited gain potential. He has the right to buy stock at a fixed price - and the stock can rise an unlimited amount. In January, a customer buys 1 ABC Jun 80 Call @ $7 when the market price of ABC is 81. The customer's maximum potential loss is: A. $700 The best answer is A. In a falling market, a long call position will expire "out the money" and the holder loses the premium paid. This is the maximum potential loss. Which of the following options strategies provides a gain equal to the premium in a bear market? A. Long Call The best answer is B. The writer of a call (short call) collects a premium in return for agreeing to sell stock at a fixed price, no matter how high the market price of the stock may go. If the market price falls, the call expires "out the money" and the writer keeps the collected premium. This is the maximum potential gain. A customer sells 1 ABC Jan 50 Call @ 3 when the market is at 49. The maximum potential gain is: A. $300 The best answer is A. The maximum potential gain for the writer of a naked call option is the premium received. This occurs if the market drops and the call expires "out the money". A customer sells 1 ABC Feb 40 Call @ $2 when the market price of ABC is 39.50. The customer's maximum potential loss is: A. $200 The best answer is D. The writer of a naked call is obligated to deliver stock that he does not own. If exercised, the stock must be bought in the market for delivery. Since the market price can rise an unlimited amount, the maximum potential loss is unlimited as well. The purchase of a put is a: A. bull strategy The best answer is B. The buyer of a put has the right to sell stock at a fixed price in a falling market. The buyer has ever increasing gain potential as the market falls, so this is a bear market strategy. A customer buys 1 ABC Jul 45 Put at $4 when the market price of ABC is 46. The customer's maximum potential gain is: A. $400 The best answer is B. The maximum gain for the holder of a put occurs if the market goes to "0". If it does, he can sell the stock at 45 and purchase it for nothing. Since he paid $400 in premiums for this right, the maximum potential gain is: $4,500 - $400 = $4,100. A customer buys 1 ABC Jul 50 Put at $4 when the market price of ABC is 51. The maximum potential loss to the holder is: A. $0 The best answer is B. The holder of a put buys the right to sell at a fixed price. If the contract expires "out the money," the maximum loss is the premium paid. This occurs if the market price rises above the strike price. A customer buys 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The maximum potential loss for the customer is: A. $400 The best answer is B. The holder of a put buys the right to sell at a fixed price. If the contract expires "out the money," the maximum loss is the premium paid. $400 was paid per contract ($800 for 2 contracts), so $800 is the maximum potential loss. This occurs if the market price rises above the strike price. A customer could be obligated to purchase stock at a future date if the customer is the: A. buyer of a call The best answer is D. The seller (writer) of a put is obligated to buy the underlying security at the strike price if the market falls. In a falling market, the buyer of the put will exercise the contract, selling the stock to the writer at the strike price. Because the writer had to buy the stock at a strike price that is higher than the market price, the writer will have a loss. A customer sells 1 ABC Jul 40 Put at $6 when the market price of ABC is 38. The customer's maximum potential gain is: A. $600
The best answer is A. The maximum gain for the writer of a naked call or put is the premium collected. This happens if the contract expires "out the money". A customer sells 2 ABC Jan 45 Puts @ $3 when the market price of ABC is $46. The maximum potential loss for the customer is: A. $600 The best answer is B. If the market goes to zero, the put writer will experience the maximum potential loss. The writer of the puts will be exercised, forcing him to buy worthless stock at the $45 strike price. However, the customer has received $3 per share in premiums. The net loss is $42 per share x 200 shares = $8,400. A customer that is short ABC stock in his portfolio buys put options on that stock. Why would the customer do this? A. To protect the ABC stock position from an adverse market move The best answer is D. The purchase of a put gives the customer the right to sell shares at the strike price. The only reason why a person who is already short that stock would buy puts on the stock would be to give the customer the ability to sell more shares at the strike price if the market price of the stock should move down. A customer with no stock position sells 1 ABC Call and sells 1 ABC Put. The customer would do this to maximize potential profit if the market: A. stays flat The best answer is A. The seller of an option receives a premium, hoping that the contract expires worthless. If a call is sold, the contract expires if the market stays flat (or if the market falls). If a put is sold, the contract expires if the market stays flat (or if the market rises). Maximum profit occurs if the market stays flat and both contracts expire "at the money." Then the seller keeps the 2 collected premiums. If the market rises, the seller starts to lose on the short naked call. If the market falls, the seller starts to lose on the short naked put. A customer owning 100 shares of stock could receive protection by: A. buying another 100 shares of the stock The best answer is C. In order to hedge a long stock position against a downside market move, the best choice is to buy a put. The long put option allows the holder to put (sell) the stock at the exercise price if the market falls - protecting the stock position from downside market risk. A customer buys 100 shares of ABC stock at 48 and buys 1 ABC Jan 50 Put @ 7. The maximum potential gain is: A. $700 The best answer is D. The customer has paid $48 for the stock and $7 for the put, for a total outlay of $55. If the stock declines, he is hedged, since he has the right to sell for $50 with the long put; so he can lose only 5 points (bought at $55 total; sold at $50 upon exercise). However, if the stock rises, he lets the put expire "out the money" and can ride the price of the stock up, with theoretically unlimited gain potential. A customer buys 100 shares of XYZ at 51 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential loss is: A. $500 The best answer is B. The long put gives the stock owner the right to sell at $50. Since he bought the stock at 51, exercising results in a 1 point stock loss. In addition, the premiums paid of $5 are lost, for a total loss of 6 points or $600 maximum. What position can an investor take to hedge a short stock position? A. long put The best answer is C. When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk. A customer sells short 100 shares of ABC stock at 52 and buys 1 ABC Mar 55 Call @ 5. The maximum potential gain is: A. $500 The best answer is B. If the stock falls, the customer gains on the short stock position. He sold the stock for $52. If it falls to "0," he can buy the shares for "nothing" to replace the borrowed shares sold and make 52 points. He lets the call expire "out the money" losing 5 points, so the maximum potential gain is 47 points. A customer sells short 100 shares of PDQ at 58 and buys 1 PDQ Jul 60 Call @ $3. The customer's maximum potential loss is: A. $200 The best answer is C. The long call allows the customer to buy in the stock position at $60. Since the stock was sold at $58, exercise results in a net loss of $2 on the stock. The customer paid $3 for the call, so the total loss is $500. An investor owns a portfolio of large capitalization blue chip stocks, each of which happens to be in the Dow Jones Industrial Average. He wishes to protect his portfolio from a market downturn without selling the positions. The best recommendation is to: A. buy a narrow based index put The best answer is C. Buying an index put, specifically the DJX option (Dow Jones Industrial Average), is the best way to protect the portfolio. The DJX is broad-based, because even though it only has 30 stocks, they are in differing industries. A narrow based index option is either industry specific or country specific. Which of the following option positions is used to generate additional income against a long stock position? A. long call The best answer is B. A covered call writer owns the underlying stock position. He sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If he expects the market to rise, he would not write the call against the stock position because the stock will be "called away" in a rising market. If he expects the market to fall, he would sell the stock or buy a put as a hedge. The customer would not sell a put to generate extra income against the long stock position, because if the market falls, the customer would be exercised on short put, and thus would have to buy another 100 shares at the strike price. Thus, in a declining market, the customer would lose double. A customer buys 200 shares of GE at 72 and sells 2 GE 70 Calls @ $6. The maximum potential gain is: A. $800 The best answer is A. If the market rises, the calls are exercised. The stock (which cost $72) must be delivered at $70 for a loss of $2 per share. Since $6 was collected in premiums for selling the call, the net gain, if exercised, is 4 points or $400 per contract x 2 contracts = $800. A customer buys 200 shares of Ford at 68 and sells 2 Ford 70 Calls @ $3. The maximum potential gain is: A. $500 The best answer is B. If the market rises, the calls are exercised. The stock (which cost $68) must be delivered at $70 for a gain of $2 per share. Since $3 was collected in premiums for selling each call, the net gain, if exercised, is 5 points or $500 per contract x 2 contracts = $1,000. A customer buys 100 shares of ABC stock at 45 and sells 1 ABC Jan 45 Call @ 2 on the same day in a cash account. The customer's maximum potential loss is: A. $4,300 The best answer is A. If the stock drops, the call expires "out the money". As the stock keeps dropping, the customer loses more and more on the stock position. Because he effectively paid $4,300 ($45 price - $2 premium collected) for the stock, this is his maximum potential loss. An investment adviser manages the portfolio of a client on a discretionary basis. The customer's objective is conservation of principal and income. Under prudent investor standards, which statement is TRUE about the use of options in the portfolio? A. The use of options strategies is unsuitable for this client based on her investment objective The best answer is C. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the customer. If the market falls, the calls expire and the customer loses on the stock (which he would have lost on anyway!).
Selling a put against a stock position sold short is a suitable strategy when the market is expected to: A. remain stable The best answer is A. Selling stock short alone is a bearish position. Selling a put alone is neutral or bullish strategy. Selling a put against a short stock position is a neutral strategy (as is any income strategy). If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains. A customer sells short 100 shares of DEF stock at $62 and sells 1 DEF Oct 60 Put @ $6. The maximum potential gain while both positions are in place is: A. $800 The best answer is A. If the market drops, the short put is exercised and the customer must buy the stock at $60. Since he sold the stock at $62, he gains 2 points, in addition to collecting 6 points of premiums. Thus, the maximum gain is $800. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss. A customer sells short 100 shares of ABC stock at $60 and sells 1 ABC Oct 60 Put @ $6. The maximum potential loss is: A. $600 The best answer is D. If the market rises, the short put expires and the short stock position must be covered by making a purchase in the market. The loss potential is unlimited. A customer sells short 100 ABC @ $35 and sells 1 ABC Jan 35 Put @ $3. The customer would NOT make money if the market price for ABC was at: A. $30 The best answer is D. A customer with a short stock / short put position loses if the market rises. The customer sold the stock at $35 and collected $3 in premiums, for a total of $38. To break-even, the stock must be bought for this amount. If the stock is bought for more than $38, the customer loses. Therefore, a loss is experienced at $40. To summarize, the formula for break-even for a short stock / short put position is: Combination of short stock and short put break-even = short sale price + premium A customer is long the Swiss Franc at a cost of $.60 per SF. The customer wishes to place a collar on the position using PHLX SF FLEX options. To create the collar, the customer would: I Buy 1 PHLX 59 SF Call A. I and
III The best answer is C. A "collar" is the purchase of a put at a strike price below that of the underlying instrument (putting a floor on the instrument's price); and the sale of a call at a strike price above that of the underlying instrument (creating a ceiling price, above which the instrument will be called away). By putting a collar on the price, the customer is essentially guaranteeing a minimum and maximum price for the underlying instrument. The net cost of such a collar should be close to "0" since both contracts are "out the money" and the premium received from the sale of the call offsets the premium paid to buy the put. To create a collar on XYZ stock when the stock is trading at $68, which option positions would be taken? A. Long 1 XYZ Jan 70 Call / Short 1 XYZ Jan 65 Put The best answer is C. A "collar" on a stock position is designed to provide downside protection at minimal cost. The stock is trading at $68, so the purchase of an ABC Jan 65 Put (3 points "out the money") would be cheaper than the purchase of a 70 put (2 points "in the money"). To offset the cost of the put purchase, the sale of an ABC Jan 70 Call (2 points "out the money") would provide some premium income. If the stock drops, the 65 put would be exercised, protecting the position from further loss. On the other hand, if the stock rises above $70, the short call would be exercised, obligating the customer to deliver the stock at $70, with no further gain on the stock position. Thus, the price is "collared" between $65 and $70 per share. A portfolio manager would sell calls against the securities in the managed portfolio in order to: A. protect the positions against a bear market The best answer is B. Covered call writing is one of the most conservative and popular strategies used by portfolio managers to increase income (and hence return) from the investments. In addition to the dividend income from the stocks, if the market stays flat, the calls will expire and the premium income will be earned. To protect the stock positions, puts would be purchased. Diversification would be increased by purchasing stocks or call options on other companies than those held in the portfolio. To speculate on the direction of the market, long calls (speculating on a bull market) or long puts (speculating on a bear market) would be used. The earliest that an American style option can be exercised is: A. anytime
before the expiration date of the contract The best answer is A. European style options can only be exercised on the business day prior to the expiration of the contract. Contracts expire on the Saturday following the third Friday of the month. The last time to exercise is the third Friday of the month, up until 5:30 PM ET. In contrast, American style options can be exercised anytime prior to expiration. Stock options are American style; the vast majority of index options are European style. What type of option can only be exercised at expiration? A. American Style The best answer is B. An American style option is one that can be exercised at any time. In contrast, a European style option can only be exercised at expiration - not before. Individual stock options are American style; most index options are European style. A speculator that initiates a long futures position in Euros: I believes that the Euro will decline A. I and III The best answer is C. When one goes long a futures contact, this is a "bet" that the price of the reference asset will increase. Futures contracts can be offset at anytime by trading, so the contract can be closed with an offsetting sale. If the contract is not closed with an offsetting sale, then the seller is required to take delivery and pay for the Euros on the delivery date. The purchaser of a futures contract has the: A. right to buy a specific commodity at a certain price and grade at a specific date and location through an organized futures exchange The best answer is B. A futures contract differs from an options contract because the buyer of an option has the right to exercise, but does not have to do so at expiration, while the holder of a futures contract has agreed to buy the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. Similarly, the seller of a futures contract must deliver the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. To protect against rising prices before a future purchase, one would: A. buy a futures contract The best answer is A. The purchase of a futures contract is a contract to buy the physical commodity at a future date and price that is set today. Thus, it will protect against rising prices before a future purchase is made. A client has a large position of 30-year Treasury Bonds is concerned that interest rates may start to rise. To protect against this, the customer could: A. go long a 30-year T-Bond futures contract The best answer is B. The risk to this investor is that T-Bond prices will fall as interest rates rise. To hedge against this, the customer could buy T-Bond puts or could sell T-Bond forward or futures contracts. The forward or futures contract specifies a set date in the future and a set price at which the bonds can be sold. If bond prices fall, the contract can be "bought back" cheaper, giving a profit that will offset the loss on the physical T-Bonds if interest rates should rise. The seller of a futures contract has the: A. right to buy a specific commodity at a certain price and grade at a specific date and location through an organized futures exchange The best answer is D. A futures contract differs from an options contract because the buyer of an option has the right to exercise, but does not have to do so at expiration, while the holder of a futures contract has agreed to buy the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. Similarly, the seller of a futures contract must deliver the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. Which of the following information is included in a (standardized) commodities futures contract? I Acceptable grades of the commodity A. I and II only The best answer is C. Commodities futures contracts are "standardized," which makes them easier to trade. Each exchange has its own contract for a standard size (quantity) and quality of the commodity (the exchange sets the different varieties or grades that can be delivered at various price differentials to the contract price) and there are standardized future delivery dates for the underlying commodity, if the contract is not closed by trading as of that date. What is not standardized is the price of the contract - this is determined between buyer and seller on the floor of the exchange. A contract to purchase or sell a specified commodity at a specified price and grade to a specified location on a specified date, entered into through an organized exchange: I is a forward contract A. I and III The best answer is C. Futures markets are exchanges that trade "standardized" contracts, which makes them easier to trade. The standardizations include contract size, contract expiration, contract price intervals, contract delivery location (for physical commodities like corn or wheat, if the contract is not closed by trading prior to its expiration date). In contrast, forward contracts are non-standardized custom contracts entered into between a buyer and seller. There is virtually no secondary market for these. Commoditization is a meaningless term in the context of this question - a commoditized product is one that loses its uniqueness or brand value, and hence is treated as a "commodity." When comparing options to futures contracts, which statements are TRUE? I Options are securities that are regulated and exchange traded A. I and III The best answer is A. Both options and futures are regulated, standardized, exchange-traded contracts. Only forward contracts are "custom" contracts that trade OTC. Forward contracts: I can be closed by trading on an exchange A. I and III The best answer is D. Forward contracts require delivery of an asset at a fixed price and date in the future, but they are custom contracts that are created between 2 institutions. They are not standardized and only trade OTC. A food manufacturer has entered into a contract to buy 5,000 bushels of corn at $4.23 per bushel, to be delivered at the firm's place of business, 6 months from now. The firm has entered into a(n): A. options contract The best answer is C. Forward contracts are custom, unregulated, OTC contracts entered into between a buyer and a seller that specify that the underlying asset be delivered at the contract price at a stated date in the contract. These are non-standardized contracts that are not exchange traded. In contrast, futures and options contracts are standardized, are exchange traded, and are regulated. Delivery contract is a meaningless term in the context of this question. Forward contracts are: I standardized and exchange traded A. I and III The best answer is D. Forward contracts are custom contracts that are negotiated between buyer and seller. They are issued OTC and there is very limited trading - thus it may not be possible to do an offsetting trade with a forward contract. Forward contracts are not subject to federal regulation. The difference between a cash forward contract and a commodity futures contract is that the forward contract: A. is traded
over-the-counter The best answer is A. Futures contracts are standardized exchange traded contracts to deliver a commodity at a future date. The expiration/delivery date is standardized in the contract. The contract size is standardized, as is the minimum acceptable grade of the commodity to be delivered. The price of the contract is established by auction on the exchange, so it is not standardized. In contrast, a forward contract is NOT standardized. Rather, it is a custom-created contract between a buyer and seller for delivery of a specified commodity at a date in the future. All terms of a forward contract are negotiated, whereas the only thing negotiated in a futures contract is the price. Forward contracts are privately created and any trading (not likely) cannot occur on an exchange - rather, any trades would occur over-the-counter. Forward contracts differ from futures contracts in all of the following ways EXCEPT forward contracts are: A. non-standardized The best answer is D. Forward contracts are custom contracts that are negotiated between buyer and seller. They are issued OTC and there is very limited trading - thus it may not be possible to do an offsetting trade with a forward contract. Forward contracts are not subject to federal regulation. In contrast, futures contracts are standardized, exchange traded contracts. They are regulated by the CFTC - the Commodities Futures Trading Commission. Because they are actively traded, it is easy to do an offsetting trade before the delivery date. Both futures and forwards are derivatives, because their price movements are based on the price movement of a reference asset. Which of the following derivatives is NOT defined as a security? I LEAP A. I and III The best answer is C. LEAPs are long term options on single stocks or indexes that are exchange traded. They are defined as securities. Swaps are derivatives, but they are not defined as securities. A real estate option is a derivative, but it is not a security. Finally, while futures contracts are derivatives and are not securities; options contracts on futures are defined as a security. Which of the following is NOT a security? A. Variable annuity for retirement The best answer is B. A fixed annuity is not security; a variable annuity is a security. A futures contract is not a security; an option on a futures contract is a security. An American Depositary Receipt is the way that foreign shares are held in the U.S. and is a security. To hedge an adverse currency move, a currency trader that is long the currency could: I Buy currency calls A. I and III The best answer is D. If a currency trader is long the currency, the risk is that price of the currency will drop. The purchase of put options (right to sell at a fixed price) will protect from a downward market move. The sale of a forward contract will also protect the trader, since the currency is then "presold" at a fixed price. Which of the following options strategies are appropriate in a bull market?Which of the following options strategies are appropriate in a bull market? The best answer is D. Long calls give the holder the right to buy stock at a fixed price, and thus are profitable in a rising market.
Which option strategy provides the greatest profit potential in a bear market?Which of the following options strategies provides the greatest profit potential in a bear market? The best answer is C. The purchaser of a put (long put) has the right to sell stock at a fixed price, no matter how low the market price of the stock may go.
Which of the following options strategies would be considered bullish?Which two of the following options strategies would be considered "bullish"? Long calls and short puts are both "bullish" positions - covered or uncovered.
Which strategies are profitable in a rising market?Buying a call and selling a put are profitable strategies in a rising market. Buying a put and selling a call are profitable in a falling market. A long call has unlimited gain potential in a rising market. A long call spread has limited upside gain potential but costs less than a simple long call position.
|
Which of the following options strategies provides the greatest profit potential in a bull market?
zusammenhängende Posts
Urheberrechte © © 2024 paraquee Inc.
