Flashcards in Chapter 15 Deck (35)
A _______-based index measures the market as a whole.
A _______-based index measures the movement of a particular sector or industry.
What are two uses of index options?
To speculate on market movement or to hedge a portfolio
Is there any difference between the exercise of an index option and an equity option?
Yes, index options are cash-settled while equity options are settled by delivery of a specific security.
Equity options are based on a 100 share multiplier, while index options are based on a $______ multiplier.
Upon exercise, what must index option sellers deliver to the buyers?
The in-the-money amount of the contract (based on the close) multiplied by $100
An investor buys an OEX May 475 call at 10. What is his strategy?
An investor buys an OEX May 475 call at 10. What is his breakeven point?
An investor buys an OEX May 475 call at 10. What is his maximum gain?
An investor buys an OEX May 475 call at 10. What is his maximum loss?
The premium of $1,000 (the value of 10 x $100)
World currencies trade in the _____________________.
What are the hours of operation for the Interbank Market?
24 hours a day
True or False: The Interbank Market is a fully regulated and centralized market.
False. The Interbank Market is unregulated and decentralized.
What is the settlement for spot trades?
two business days
For most world currency quotes, the decimal must be moved how many places to the left to convert to U.S. dollars?
two places to the left; except for Japanese Yen which moves 4
To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved ______ places to the left.
How is the premium for a world currency option calculated?
Contract size x the premium (with decimal moved appropriately)
True or False: If an investor expects the U.S. dollar to strengthen, she could profit by buying U.S. dollar calls.
False. There are no U.S. dollar calls or puts issued; therefore, all answers must be based on a world currency.
True or False: The buyer of a British pound call will profit if the British pound rises with a falling U.S. dollar.
There is an inverse relationship between the movement of a world currency and the _____________.
Interest rate options are ______-based.
Yield-based options are ______-based.
An investor, believing interest rates will rise, could profit by taking what interest-rate option position?
Buy interest-rate puts or write interest-rate calls
An investor, believing interest rates will rise, could profit by taking what yield-based option position?
buy yield-based calls or write yield-based puts
What is the primary use of VIX options?
To give individual investors the ability to trade market volatility
What could an investor do if she expects the market to decline and volatility to increase?
Buy VIX calls
What could an investor do if she expects the market to rise and volatility to decrease?
Buy VIX puts
VIX options use a __________ style exercise and settle in ______.
European style exercise
settle in cash
Volatility tends to increase during a ___________ market.
What is the VIX?
The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility
What is the underlying instrument used to calculate the VIX?
Real-time S&P 500 option bid/ask quotes weighted to a constant 30-day measure of expected volatility
What should an investor do on the VIX if she anticipates an increase in volatility?
Buy VIX Calls. If volatility increases, the underlying VIX will rise and the calls will increase in value.
When does volatility tend to increase?
When the market (S&P 500) drops abruptly
Identify the acronym: VIX
CBOE's Volatility Index