Chapter 15 Flashcards Preview

Series 7 > Chapter 15 > Flashcards

Flashcards in Chapter 15 Deck (35)
1

A _______-based index measures the market as a whole.

broad-based

2


A _______-based index measures the movement of a particular sector or industry.

narrow-based

3

What are two uses of index options?

To speculate on market movement or to hedge a portfolio

4

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.

5

Equity options are based on a 100 share multiplier, while index options are based on a $______ multiplier.

$100

6

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

7


An investor buys an OEX May 475 call at 10. What is his strategy?

Bullish

8

An investor buys an OEX May 475 call at 10. What is his breakeven point?

485

9

An investor buys an OEX May 475 call at 10. What is his maximum gain?

unlimited

10


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)

11

World currencies trade in the _____________________.

Interbank Market

12

What are the hours of operation for the Interbank Market?

24 hours a day

13

True or False: The Interbank Market is a fully regulated and centralized market.

False. The Interbank Market is unregulated and decentralized.

14

What is the settlement for spot trades?

two business days

15

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

16

To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved ______ places to the left.

4

17

How is the premium for a world currency option calculated?

Contract size x the premium (with decimal moved appropriately)

18


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.

19

True or False: The buyer of a British pound call will profit if the British pound rises with a falling U.S. dollar.

True

20


There is an inverse relationship between the movement of a world currency and the _____________.

U.S. Dollar

21

Interest rate options are ______-based.

price-based

22

Yield-based options are ______-based.

yield-based

23

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

24

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

25

What is the primary use of VIX options?

To give individual investors the ability to trade market volatility

26

What could an investor do if she expects the market to decline and volatility to increase?

Buy VIX calls

27

What could an investor do if she expects the market to rise and volatility to decrease?

Buy VIX puts

28

VIX options use a __________ style exercise and settle in ______.

European style exercise
settle in cash

29

Volatility tends to increase during a ___________ market.

declining

30

What is the VIX?

The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility

31

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

32

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.

33

When does volatility tend to increase?

When the market (S&P 500) drops abruptly

34

Identify the acronym: VIX

CBOE's Volatility Index

35

The underlying asset of an interest rate option is a _________ instrument.

treasury