Question

1) Derivative markets differ from stock and bond markets in that:

A. derivative products are a zero sum game

B. derivatives are not issued by the company that the contracts relate to

C. both A and B

D. none of the above

2) An investor buys a Call option on a stock for $5. The strike price is $40 per share. On the expiry date the market price of the stock is $42 per share.

A. The investor has made a loss of $5

B. The investor has made a profit of $2

C. The investor has made a profit of $3

D. The investor has made a loss of $3

3) A Put option with a strike price of $60 on a stock trading at $50 and expiring in one month’s time:

A. has zero time value

B. has zero intrinsic value

C. would trade for $10 in the options market

D. is in-the-money

4) Suppose you are looking at two different Call options on the same stock with the same expiry date, but one has a strike price of $40 and the other has a strike price of $50. The option with strike price $50 has:

A. a lower premium than the option with strike price $40

B. a higher premium than the option with strike price $40

C. a premium of $10

5) Which of the following investments would require margin?:

A. buying a put option

B. buying a futures contract

C. A and B

D. none of the above

6) Hedging:

A. is attempting to profit from a short-term increase/decrease in the price of an asset

B. is an attempt to reduce risk of existing investments

C. is attempting to profit from mis-pricing in the market

D. none of the above

7) An investor buys a Call option on a stock for $3. The strike price is $50 per share. On the expiry date the market price of the stock is $48 per share.

A. The investor has made a loss of $5

B. The investor has made a profit of $2

C. The investor has made a profit of $3

D. The investor has made a loss of $3

8) A Put option with a strike price of $30 on a stock trading at $20 and expiring in one month’s time:

A. has zero time value

B. has zero intrinsic value

C. would trade for $10 in the options market

D. is in-the-money

9) An investor buys a Put option on a stock for $5. The strike price is $30 per share. On the expiry date the market price of the stock is $40 per share.

A. The investor has made a loss of $5

B. The investor has made a profit of $10

C. The investor has made a profit of $15

D. The investor has made a loss of $10

10) A Call option with a strike price of $60 on a stock trading at $50 and expiring in one month’s time:

A. has zero time value

B. has zero intrinsic value

C. would trade for $10 in the options market

D. is in-the-money

11) If you buy a put option:

A. you have the right to buy the asset

B. you have given the other party the right to buy the asset

C. you have the right to sell the asset

D. you have given the other party the right to sell the asset

Answer 1

1)

B. derivatives are not issued by the company that the contracts relate to

2)

D. The investor has made a loss of $3

3)

D. is in-the-money

4)

A. a lower premium than the option with strike price $40

5)

B. buying a futures contract

6)

B. is an attempt to reduce risk of existing investments

7)

C. The investor has made a profit of $3

8)

D. is in-the-money

9)

A. The investor has made a loss of $5

10)

B. has zero intrinsic value

11)

C. you have the right to sell the asset