OPTIONS

Question 1

A type of derivative contract which gives the option buyer the right but not the obligation to buy or sell an underlying asset

Answer 1

option

Question 2

is one example of a derivative security

Answer 2

option

Question 3

a security that derives its value from another asset

Answer 3

derivative security

Question 4

The asset from which a derivative security obtains its value

Answer 4

Underlying asset

Question 5

Types of option

Answer 5

call option
put option

Question 6

It grants the right to purchase or buy a share of stock at a fix price on or before a certain date

Answer 6

call option

Question 7

It grants the right to sell a share of stock at a fixed price on or before a certain date

Answer 7

put option

Question 8

The price at which an option holder can buy or sell the underlying asset

Answer 8

Strike price or exercise price

Question 9

The date on which the right to buy or sell the underlying asset expires

Answer 9

Expiration date

Question 10

This rise in value as the underlying stock price goes down

Answer 10

put options

Question 11

This increase in value as the underlying stock price goes up

Answer 11

call option

Question 12

The buyer can exercise the option at any time before the expiry of the option contract

Answer 12

American option

Question 13

An option that grants the right to buy an underlying asset on or before the expiration date

Answer 13

American call option

Question 14

The buyer can exercise the option only on the date of expiration of the option

Answer 14

European option

Question 15

An option that grants the right to buy the underlying asset only on the expiration date

Answer 15

European call option

Question 16

To own an option or another security

Answer 16

Long position

Question 17

To sell an option or another security

Answer 17

Short position

Question 18

Pay (receive) the strike price and buy (sell) the underlying asset

Answer 18

Exercise the option

Question 19

The market price of the option

Answer 19

Option premium

Question 20

These do not usually occur in face-to-face transactions between two parties

Answer 20

Option trades

Question 21

Option trades are either on an

Answer 21

An exchange or over-the-counter market

Question 22

It may serve as a guarantor fulfilling the terms of an option contract if one party defaults

Answer 22

Option exchange

Question 23

The risk that the counterparty in an over-the-counter option transactions will default on its obligation

Answer 23

Counterparty risk

Question 24

An agreement between two parties in which one party pays the other party the cash value of its action precision rather than forcing a to exercise the option by buying or selling the underlying asset

Answer 24

Cash settlement

Question 25

Moneyness of an option

Answer 25

In the money out-of-the-money at the money

Question 26

Call option is in the money when

Answer 26

When the stock price is greater than the strike price

Question 27

Put option is in the money when

Answer 27

When the stock price is less than the strike price

Question 28

Call option is out-of-the-money when

Answer 28

When the stock price is less than the strike price

Question 29

Put option is out-of-the-money when

Answer 29

When the stock price is greater than the strike price

Question 30

Call option and put option is at the money when

Answer 30

When the stock price equals the strike price

Question 31

The prophet that an investor makes from exercising and option ignoring transactions costs and the option premium

Answer 31

Intrinsic value

Question 32

The difference between an options market price and its intrinsic value

Answer 32

Time value

Question 33

The price an investor would be willing to pay for the option the instant before it expires

Answer 33

Options payoff

Question 34

The value received from exercising and option on the expiration date ignoring the initial premium required to purchase the option

Answer 34

Options payoff

Question 35

A diagram that shows how the expiration date of from an option or a portfolio varies as the underlying asset price changes

Answer 35

Payoff diagrams

Question 36

Graphs that illustrates an options payoff as a function of the underlying stock price

Answer 36

Payoff diagrams

Question 37

These are extremely useful tools for understanding how options behave

Answer 37

payoff diagrams

Question 38

The difference between the pay of receive when the option expires and the premium paid to acquire the option

Answer 38

Net payoff

Question 39

To buy or to sell an option without a simultaneous position in the underlying asset

Answer 39

Naked option position

Question 40

Occurs when an investor buys or sell an option on a stock without already owning the underlying stock

Answer 40

Naked call option

Question 41

Occurs when a trader buys or sell an option without owning the underlying stock

Answer 41

Naked put option

Question 42

A portfolio containing a share of stock and a put option on that stuff

Answer 42

Protective put

Question 43

A relationship that links the market prices of stock risk-free bonds call options and put options

Answer 43

Put call parity

Question 44

A model that uses the principle of no-arbitrage to calculate call and put values

Answer 44

Binomial option pricing model

Question 45

The ratio of calls to shares in a perfectly hedge portfolio as or as the ratios of the shares to call

Answer 45

hedge ratio

Question 46

Can be modified to allow for multiple stock price movements throughout the life of an option

Answer 46

Binomial model

Question 47

The author of the black in scholes model

Answer 47

myron scholes and fisher black

Question 48

A normal distribution with a mean of 0 and a standard deviation of 1

Answer 48

Standard normal distribution

Question 49

It is essentially call options that give employees the right to buy shares in the company they work for at a fix price

Answer 49

Employee stock options

Question 50

These are most valuable when the price of the underlying stock is well above the strike price

Answer 50

Employee stock options

Question 51

This is securities that grant right similar to a call option except that when this is exercise the firm must issue a new shares and it receive the strike price as a cash inflow

Answer 51

Warrants

Question 52

This is securities that are issued by firms and that grant investors the right to buy shares of stock at a fixed price for a given period of time

Answer 52

Warrant

Question 53

Warrant attached to another security offering that give investors more upside potential

Answer 53

Equity kickers

Question 54

A bond that give investors the right to convert their bonds into shares

Answer 54

Convertible bond

Question 55

The number of shares bondholders receive if they convert their bonds into shares

Answer 55

Conversion ratio

Question 56

The market price of a convertible bond divided by the number of shares of stock that bondholders receive if they convert

Answer 56

Conversion price

Question 57

The percentage increase in the underlying stock that must occur before it is profitable to exercise the option to convert a bond into shares

Answer 57

Conversion premium

Question 58

The market price of the stock x the number of shares of stock that bondholders receive if they convert

Answer 58

Conversion value

Question 59

It is important because it helps define a lower bound on the market value of a convertible bond

Answer 59

Conversion value