Chapter 9 (1 Q) Types and Characteristics of Derivative Securities

Question 1

Opening an Options Account

Answer 1

No specific rule in NASAA

Must have a designated supervisor approving accounts

Have to fill out the Options Disclosure Document (ODD)

Asks about investment experience and knowledge

Question 2

Options

Answer 2

Derivative securities (derive value from an underlying instrument)

Buyer receives the right, seller has the obligation

All options are for 100 shares

Option cost is called a premium and is dollars per share

Question 3

American vs European Style options

Answer 3

American= Anytime exercise

European= Expiration date

Question 4

Straddle

Answer 4

Buying a put and a call of one security

Seeking volatility in the price

Question 5

Covered Calls

Answer 5

Considered the most conservative option strategy

Writing a naked call is considered the most risky strategy

Question 6

Forward Contracts

Answer 6

Exchange commodities at a future date for a specific price

Considered illiquid

Each party risks the credit and trustworthiness of the other

Question 7

Futures

Answer 7

Exchange traded commodity obligations

Gains are credits
Losses are debits

All accounts must be settled before opening of trading the next day on futures contracts

98% of futures are offset at the clearing house before actual delivery

Higher price means that the buyer of the contract earned a profit

A farmer would sell a contract to lock in the price they will receive

Do not come under supervision of SEC