Introduction to Derivatives

Question 1

How would you describe the risk associated with buying a futures contract?

Answer 1

Limited to the futures price

Question 2

European options are:

Answer 2

Options that may be exercised on their expiry date only

Question 3

Which of the following is true of a call option?

Answer 3

It is used to hedge a short underlying position

Question 4

Which ONE of the following is an example of speculative activity?

Answer 4

An investor who expects the price of tin to fall, writing naked call options

Question 5

Which of the following are choices for the buyer of a futures contract:

Answer 5

Hold the future to expiry and then take delivery of the underlying

Sell the future before expiry

Question 6

The premium on an equity index option is:

Answer 6

Paid one day after the trade date (T+1)

Question 7

Which of the following is true of a call option?

Answer 7

It is used to hedge a short underlying position

Question 8

An exchange-traded option with non-standardised terms, which is centrally-cleared, is which type of option?

Answer 8

A FLEX option

Question 9

Which of the following best describes a call option?

Answer 9

The right to buy an underlying asset at an agreed price on a future date

Question 10

Which of the following types of broker acts as an intermediary between other market participants, allowing them to remain anonymous?

Answer 10

Inter-dealer broker

Question 11

Which of the following best describes how easy it is for a trader to open or close a position without incurring excessive trading costs?

Answer 11

Liquidity

Question 12

In the event that the option is exercised which of the following would take delivery of the asset?

Answer 12

Writer of a put

Question 13

Which of the following is NOT a common form of arbitrage?

Answer 13

Value-added

Question 14

An investor wishes to speculate on the US dollar strengthening against the euro. Which of the following strategies would she adopt?

Answer 14

Go short Euro futures

Question 15

Which profile best fits a short put position?

Answer 15

Bullish, maximum gain is the premium, maximum loss is strike minus premium

Question 16

What position will the writer of a call on a future be in if the option is exercised?

Answer 16

Short-future

Question 17

The features of a long-call option are:

Answer 17

Limited losses with unlimited profits

Question 18

Which of the following best describes an American option?

Answer 18

An option exercisable at any time up to its expiry date

Question 19

In a standardised option contract, which of the following is not fixed in advance?

Answer 19

Premium

Question 20

Which of the following is not true with regard to futures?

Answer 20

A short-futures position is closed-out by selling a future

Question 21

Which profile best fits a short-put position?

Answer 21

Bullish: maximum gain is the premium, maximum loss is strike minus premium

Question 22

An agreement to buy a specified quantity of a specified asset on a specified future date best describes:

Answer 22

A long futures position

Question 23

A currency trader anticipates yen will strengthen against the US dollar. Which of the following should he choose?

Answer 23

Buy a yen call

Question 24

An agreement to buy a specified quantity of a specified asset on a specified future date best describes:

Answer 24

A long-futures position

Question 25

The exercise price of a traded option is:

Answer 25

The price the holder will pay or receive for the underlying if the option is exercised

Question 26

Which of the following best describes a future?

Answer 26

An agreement to buy or sell a specified quantity of a specified asset on a fixed future date at a price agreed today

Question 27

What is a future?

Answer 27

An agreement to buy or sell an asset at a certain time in the future for a certain price

Question 28

Which of the following options do not give you the right to exercise?

Answer 28

Short-put | Short-call

Question 29

How would you describe the risk associated with buying a futures contract?

Answer 29

Limited to the future's price

Question 30

The maximum potential loss which could be incurred by the holder of a put option is:

Answer 30

The premium for the option

Question 31

The maximum risk from a short futures position is:

Answer 31

Unlimited

Question 32

The maximum loss is the premium

Answer 32

The maximum loss is the premium paid for the option originally.

Question 33

Out of the examples listed below, indicate those firms that are considered sell side:

Answer 33

Investment Banks | Brokerage

Question 34

Which of the following is NOT a contingent liability transaction?

Answer 34

Buying an option

Question 35

A US exporter has made a sale of goods worth €1.5m to Germany. How could he hedge his exposure to exchange rate fluctuations before the money is received?

Answer 35

Sell euro futures | Buy euro puts

Question 36

All futures transactions are:

Answer 36

Contingent liability transactions

Question 37

Which of the following would describe liquid markets?

Answer 37

High supply, low price elasticity

Question 38

What is the maximum loss for the writer of a put option?

Answer 38

Strike minus premium

Question 39

A Japanese investor has substantial Sterling assets and uses Sterling currency futures to offset his risk. This trade is known as:

Answer 39

Hedging

Question 40

Which of the following is true of a European style call option?

Answer 40

The seller may be obliged to sell the underlying only at maturity

Question 41

An equity manager wishing to gain exposure to equity in advance of a cash inflow from a client would do which of the following?

Answer 41

Buy a FTSE100 index call option

Question 42

Which of the following are uses of futures?

Answer 42

Arbitrage Speculation Hedging Cash and carry

Question 43

Which of the following is TRUE of a call option?

Answer 43

It can be used to hedge a short underlying position

Question 44

Total premium paid

Answer 44

Total premium paid = premium x contract size x no. of contracts:

Question 45

A long-put option position has potential for:

Answer 45

Limited profit and limited loss

Question 46

Which of the following is NOT true of a put contract?

Answer 46

The writer can choose not to buy the specified asset

Question 47

All of the following are determined by the exchange in relation to contract specifications on options, except:

Answer 47

Premium

Question 48

Which of the following represents the best hedge if a fund manager holds a portfolio of gilts?

Answer 48

Sell long gilt futures

Question 49

Which two of the following are true of the impact of liquidity on transaction costs (i.e. the spread between bid and offer prices) and elasticity of prices (in comparison to volume)?

Answer 49

Greater liquidity = lower transaction costs, lower elasticity

Question 50

Which of the following features of an exchange traded option is negotiable?

Answer 50

Premium

Question 51

Which of the following best describes an equity hedge?

Answer 51

Take the opposite position in your equity futures to the one you hold in equity itself

Question 52

Which of the following is true of a European call option?

Answer 52

The seller may be obliged to sell the underlying only at maturity if the buyer exercises

Question 53

Which of the following best describes hedging?

Answer 53

Taking an opposite position in futures to your position in the underlying asset

Question 54

There are three market participants for a particular futures contract, Angie, John and Jake. At the end of the day of trading in the futures market, there are no more open positions, i.e. everyone has closed out. If Angie and John have a total loss of £3000, what profit/loss does Jake have?

Answer 54

Profit of £3000

Question 55

Which of the following choices are available to the writer of a traded option?

Answer 55

To trade out the option by closing their position | Keep the premium if the option is not exercised

Question 56

Which of the below represents a buy side firm?

Answer 56

Hedge funds