Chapter Ten: Derivatives

63 Questions | By Smzachary | Updated: Dec 14, 2012 | Attempts: 134

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Chapter Ten: Derivatives

Questions and Answers

1.

LOS Question:Describe what a derivative is
2.

LOS Question:explain the differences between over-the-counter and exchange-traded derivatives.
3.

LOS Question:Identify the types of underlying assets on which derivatives are based.
4.

LOS Question:Describe the participants in and uses of derivative trading.
5.

LOS Question: Describe what options are and how they are traded, and evaluate call and put optionstrategies for individual and institutional investors and corporations.
6.

LOS Question:Describe what forwards are, distinguish futures contracts from forward agreements andevaluate futures strategies for investors and corporations.
7.

LOS Question:Define and describe rights and warrants, explain why they are issued, and calculate thevalue of rights and warrants.
8.

WHAT DOES “DERIVATIVE” MEAN
9.

WHAT IS AN OFFSETTING TRANSACTION? CAN YOU GIVE ME AN EXAMPLE?
10.

CAN YOU SHOW THE DIFFERENCE BETWEEN OFFSETTING THE OPTIONTRANSACTION AND SIMPLY EXERCISING THE OPTION?
11.

ARE THE COSTS FOR PURCHASING AN OPTION SIMILAR TO THE COSTS FORPURCHASING A FUTURES CONTRACT?
12.

WHAT DOES “HEDGING” REFER TO?
13.

HOW DO DERIVATIVES ORDERS FLOW THROUGH THE CLEARINGHOUSE?
14.

DO OPTION PURCHASES AND FUTURES PURCHASES FACE THE SAME RISKS?
15.

IS SHORT SELLING MORE OR LESS RISKY THAN PUT OPTIONS BUYING?
16.

CAN YOU GIVE ME A BASIC UNDERSTANDING OF CALL AND PUT OPTIONS?
17.

WHAT DOES “ASSIGNED” MEAN?
18.

HOW DOES LEVERAGE FIT IN WITH OPTIONS TRADING?
19.

IS THERE A FORMULA I CAN USE TO CALCULATE INTRINSIC VALUE?
20.

CAN YOU PLEASE EXPLAIN THE CALCULATION OF TIME VALUE?
21.

CAN YOU GIVE ME A MATHEMATICAL EXAMPLE OF HOW TO CALCULATE TIMEVALUE?
22.

WHY WOULD THE TIME VALUE BE DIFFERENT FOR TWO DIFFERENT OPTIONSTHAT TRADE AT THE SAME PRICE AND HAVE THE SAME STRIKE PRICE?
23.

THERE ARE SOME EXAMPLES OF OPTIONS TRANSACTION IN THE TEXT BUTNO EXPLANATION OF HOW THE TIME VALUE WAS CALCULATED. CAN YOUPLEASE SHOW ME HOW THE CALCULATIONS WERE DONE?
24.

WHAT HAPPENS IF I WRITE A PUT AND I ALREADY OWN THE UNDERLYINGCOMMON SHARES?
25.

CAN YOU PROVIDE AN EXAMPLE OF THE RISK OF NAKED CALL WRITING?
26.

WHAT HAPPENS TO THE ORIGINAL WRITER OF THE OPTION IF I BUY ANOPTION AND LATER SELL IT?
27.

I’M CONFUSED WHEN THE TEXT STATES THAT MOST OPTION TRADERS WILLCLOSE THEIR POSITIONS BEFORE EXPIRATION. PLEASE EXPLAIN
28.

HOW DO WE DETERMINE WHAT THE PRICE OF AN OPTION SHOULD BE IN THEMARKET PLACE?
29.

WHAT ARE COVERED PUTS AND COVERED CALLS?
30.

WHY ISN’T COVERED PUT WRITING AS WIDESPREAD AS COVERED CALLWRITING?
31.

WHY IS IT HARDER TO CLOSE AN OVER-THE-COUNTER OPTIONTRANSACTION?
32.

ON WHAT DAY OF THE WEEK WOULD OPTIONS AND RIGHTS EXPIRE?
33.

WHAT ARE THE DIFFERENT TYPES OF FORWARD AGREEMENTS?
34.

CAN YOU GIVE ME AN EXAMPLE OF A SWAP?
35.

WHAT DOES MARKING TO MARKET MEAN?
36.

WHO WOULD WANT TO BUY A FUTURES CONTRACT ONLY TO BE LEFT WITHBUYING A LARGE AMOUNT OF COMMODITIES WHEN DELIVERY OCCURS?
37.

WHY WOULD ANYONE WANT TO BUY STOCK INDEX FUTURES OR OPTIONS?
38.

WHY WOULD IT BE SO DIFFICULT TO HAVE INDEX FUTURES SELLERS TODELIVER STOCK RATHER THAN CASH SETTLE THEIR POSITION?
39.

WHY WOULD MOST INVESTORS OFFSET THEIR FUTURES POSITIONS BEFORETHE DELIVERY DATE? WHAT’S THE BIG DEAL?
40.

THE FUTURES PRICE IS SET BASED ON THE CURRENT MARKET PRICE. SOHOW CAN YOU SAY THAT THE PRICE IS A FUTURE PRICE?
41.

WHAT DOES THE CASH MARKET REFER TO?
42.

CAN YOU GIVE ME AN EXAMPLE OF HOW THE LEVERAGED ASPECT OF AFUTURES CONTRACT WOULD WORK?
43.

Illustrate the differences between put and call options.
44.

What is intrinsic value? How do you calculate it?
45.

How do you calculate the time value for a call option?
46.

What is time value? Give an example.
47.

Explain what the text means when it says: "Two business days before the record date, the shares start trading ex rights and the rights begin to trade as a separate entity."
48.

Define Open Interest
49.

Why do cash settled future contracts NOT have underlying assets (per se)?
50.

What does it mean when the book says "the fact that the contracts are standardized makes it easier to offset contracts"

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Dec 14, 2012

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Smzachary

Chapter Ten: Derivatives

LOS Question:Describe what a derivative is

LOS Question:explain the differences between over-the-counter and exchange-traded derivatives.

LOS Question:Identify the types of underlying assets on which derivatives are based.

LOS Question:Describe the participants in and uses of derivative trading.

LOS Question: Describe what options are and how they are traded, and evaluate call and put optionstrategies for individual and institutional investors and corporations.

LOS Question:Describe what forwards are, distinguish futures contracts from forward agreements andevaluate futures strategies for investors and corporations.

LOS Question:Define and describe rights and warrants, explain why they are issued, and calculate thevalue of rights and warrants.

WHAT DOES “DERIVATIVE” MEAN

WHAT IS AN OFFSETTING TRANSACTION? CAN YOU GIVE ME AN EXAMPLE?

CAN YOU SHOW THE DIFFERENCE BETWEEN OFFSETTING THE OPTIONTRANSACTION AND SIMPLY EXERCISING THE OPTION?

ARE THE COSTS FOR PURCHASING AN OPTION SIMILAR TO THE COSTS FORPURCHASING A FUTURES CONTRACT?

WHAT DOES “HEDGING” REFER TO?

HOW DO DERIVATIVES ORDERS FLOW THROUGH THE CLEARINGHOUSE?

DO OPTION PURCHASES AND FUTURES PURCHASES FACE THE SAME RISKS?

IS SHORT SELLING MORE OR LESS RISKY THAN PUT OPTIONS BUYING?

CAN YOU GIVE ME A BASIC UNDERSTANDING OF CALL AND PUT OPTIONS?

WHAT DOES “ASSIGNED” MEAN?

HOW DOES LEVERAGE FIT IN WITH OPTIONS TRADING?

IS THERE A FORMULA I CAN USE TO CALCULATE INTRINSIC VALUE?

CAN YOU PLEASE EXPLAIN THE CALCULATION OF TIME VALUE?

CAN YOU GIVE ME A MATHEMATICAL EXAMPLE OF HOW TO CALCULATE TIMEVALUE?

WHY WOULD THE TIME VALUE BE DIFFERENT FOR TWO DIFFERENT OPTIONSTHAT TRADE AT THE SAME PRICE AND HAVE THE SAME STRIKE PRICE?

THERE ARE SOME EXAMPLES OF OPTIONS TRANSACTION IN THE TEXT BUTNO EXPLANATION OF HOW THE TIME VALUE WAS CALCULATED. CAN YOUPLEASE SHOW ME HOW THE CALCULATIONS WERE DONE?

WHAT HAPPENS IF I WRITE A PUT AND I ALREADY OWN THE UNDERLYINGCOMMON SHARES?

CAN YOU PROVIDE AN EXAMPLE OF THE RISK OF NAKED CALL WRITING?

WHAT HAPPENS TO THE ORIGINAL WRITER OF THE OPTION IF I BUY ANOPTION AND LATER SELL IT?

I’M CONFUSED WHEN THE TEXT STATES THAT MOST OPTION TRADERS WILLCLOSE THEIR POSITIONS BEFORE EXPIRATION. PLEASE EXPLAIN

HOW DO WE DETERMINE WHAT THE PRICE OF AN OPTION SHOULD BE IN THEMARKET PLACE?

WHAT ARE COVERED PUTS AND COVERED CALLS?

WHY ISN’T COVERED PUT WRITING AS WIDESPREAD AS COVERED CALLWRITING?

WHY IS IT HARDER TO CLOSE AN OVER-THE-COUNTER OPTIONTRANSACTION?

ON WHAT DAY OF THE WEEK WOULD OPTIONS AND RIGHTS EXPIRE?

WHAT ARE THE DIFFERENT TYPES OF FORWARD AGREEMENTS?

CAN YOU GIVE ME AN EXAMPLE OF A SWAP?

WHAT DOES MARKING TO MARKET MEAN?

WHO WOULD WANT TO BUY A FUTURES CONTRACT ONLY TO BE LEFT WITHBUYING A LARGE AMOUNT OF COMMODITIES WHEN DELIVERY OCCURS?

WHY WOULD ANYONE WANT TO BUY STOCK INDEX FUTURES OR OPTIONS?

WHY WOULD IT BE SO DIFFICULT TO HAVE INDEX FUTURES SELLERS TODELIVER STOCK RATHER THAN CASH SETTLE THEIR POSITION?

WHY WOULD MOST INVESTORS OFFSET THEIR FUTURES POSITIONS BEFORETHE DELIVERY DATE? WHAT’S THE BIG DEAL?

THE FUTURES PRICE IS SET BASED ON THE CURRENT MARKET PRICE. SOHOW CAN YOU SAY THAT THE PRICE IS A FUTURE PRICE?

WHAT DOES THE CASH MARKET REFER TO?

CAN YOU GIVE ME AN EXAMPLE OF HOW THE LEVERAGED ASPECT OF AFUTURES CONTRACT WOULD WORK?

Illustrate the differences between put and call options.

What is intrinsic value? How do you calculate it?

How do you calculate the time value for a call option?

What is time value? Give an example.

Explain what the text means when it says: "Two business days before the record date, the shares start trading ex rights and the rights begin to trade as a separate entity."

Define Open Interest

Why do cash settled future contracts NOT have underlying assets (per se)?

What does it mean when the book says "the fact that the contracts are standardized makes it easier to offset contracts"