Tutorial 6 Flashcards

(15 cards)

1
Q

In stock markets, transactions on the trading floor are executed by:

A

Market Makers

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2
Q

One or more of the following are not true of organised stock markets:

A

1 - They are open for the stocks of all companies to be traded

2 - The rules and regulations underlying corporate governance of major stock exchange markets are the same

3 - Trade in stocks is conducted over the counter (OTC)

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3
Q

Blue chip stocks are issued by:

A

Companies that are well established and inspire investor confidence

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4
Q

In stock trading, stock indexes are used to

A

1 - Allow traders complete their obligations by making cash payments based on changes in the value of the index

2 - Enable investors to track market movements through changes of index from its base value

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5
Q

In the context of stock market, when price-earnings (P/E) ratios of stocks are high:

A

1 - Investors would be attracted to such stocks because the high price is suggestive of higher growth in the future.

2 - The high price of the stock is a result of high demand for the stock

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6
Q

Investment vehicles that are made up of a pool of funds collected from many investors (including small ones) for the purpose of investing in a wide range financial assets are known as:

A

Mutual Funds

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7
Q

Derivatives are high risk financial instruments because

A

They are highly geared

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8
Q

One or more of the following statements can be said to be true of forward contracts as vehicle of transaction:

A

1 - They involve trade that takes place only over the counter

2 - They thrive on trust between two trading parties who know one another very well.

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9
Q

Forward and future contracts are alike in that:

A

Arrangements in both cases leave no room for default by contract parties

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10
Q

FTSE100 or Footsie100 is

A

A stock index of 100 ‘blue chip’ companies with the highest capitalization listed on the London Stock Exchange

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11
Q

In what way is an options contract different from a futures contract?

A

In option contracts, unlike in future contracts, there is no obligation to complete contract terms by delivering or buying underlying assets at agreed prices at the expiry date of the contract.

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12
Q

An investor bets on the odds that stock prices would increase in a year’s time. As a financial engineer, you would advise the investor

A

To buy a call option

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13
Q

An investor decides to enter into a call options contract to buy 1000 shares of Company X in a year’s time. The contract sets out a call premium of £5 per share; and a contract/strike price of £20 per share. What would be the investor’s decision at the date of contract expiry if the spot price for Company X shares was £30 apiece?

A

He would decide to exercise his option to buy as this would earn a profit of £5,000.

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14
Q

What kind of traders would find a futures contract more useful and attractive than an options contract?

A

1 - Sellers of products with short shelf life like agricultural and perishable commodities

2 - Sellers of stocks that are vulnerable to high price volatility

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15
Q

In what sense do call and put contracts provide insurance?

A

They require the option holders to make down payments as put and call premiums

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