Question

An example of a passive fund is commonly:

	a.	A large cap fund.
	b.	A closed end fund.
	c.	An open end fund.
	d.	An index fund.
	e.	A high yield fund.

Which is riskier, purchasing a covered call option or a future for the same time period and why?

	a.	A covered call option - you can lose your entire investment if you are wrong about the ultimate outcome.
	b.	A future - it is purchased on margin and you often have the obligation to buy the commodity even if the commodity price declines.
	c.	A covered call option, it has a higher beta.
	d.	A future, the lack of commonly purchasing it on margin is more than offset by the large gains on all futures.
	e.	A covered call option, you must purchase the item even after taking a market loss on the option.

Answer 1

1) Ans) d. An index fund

Any fund that tracks an index falls under baner of passive fund. unlike active fund, fund managers do not select which stocks should form part of fund in passive fund. passive funds are generally copy of an index.

2) Ans) b. A future - it is purchased on margin and you often have the obligation to buy the commodity even if the commodity price declines

By enteriing in future contract, one is obliged to buy or sell underlying at specified price in future. Thus even if underlying moves in oppostite direction then we anticipated , one has to buy the commodity

on other hand, cover call involes selling call option of the stock already owned. Thus even if the market price exceeds strike price on expiry one has to give delivery of shares already held.