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Flashcards in Tutorial 6 Deck (15):

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

Market Makers


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

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)


Blue chip stocks are issued by:

Companies that are well established and inspire investor confidence


In stock trading, stock indexes are used to

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


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

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


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:

Mutual Funds


Derivatives are high risk financial instruments because

They are highly geared


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

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.


Forward and future contracts are alike in that:

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


FTSE100 or Footsie100 is

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


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

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.


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

To buy a call option


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?

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


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

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

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


In what sense do call and put contracts provide insurance?

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