Unit 4 - Questions

the term derivative would not include

REITs

which of the following statements regarding derivative securities is not true?

an owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date)

among the purposes of purchasing derivatives would be all of the following except

income

GEMCO Manufacturing Company, traded on the NYSE, has announced that it will be issuing 10 million new shares of common stock to raise new capital for the purchase of new equipment. your client, owning 1,000 shares of GEMCO common stock, would probably receive

preemptive rights to purchase some of the new shares

writing options can be a useful method of generating a stream of income for your customer's portfolio. one issue to be considered is that

the income is generally taxed as a short-term gain

all of the following are standardized for equity options except

the maximum profit

the value of a derivative is based on

the value of the underlying asset

all of the following statements describe preemptive rights except

they are most commonly offered with debentures to make the offering more attractive

a commodities speculator purchases a 1,000-bushel wheat futures contract for 80 cents per bushel. at expiration, the settlement price is 70 cents per bushel. this individual

has a $100 loss

a customer has the right to sell 100 shares of MNO at 60 any time between July and October. which term best describes the situation?

long put

an investor takes a long position in a commodity forward contract at a forward price of $105 when the spot price (current market price) is $102. one month later, the spot price has increased to $110. at that time, the forward price of the contract is

$105

which of the following statements concerning put and call options is not correct?

a put option permits investors to speculate on a rise in the price of an underlying common stock without buying the stock itself, and a call option allows investors to peculate on a decline in the stock price without the short selling the common stock any time prior to a specified expiration date

forwards are commonly used by producers (farmers) to hedge the risk of the price of the commodity falling before it is able to be harvested and sold. for example, if a farmer has planted soybeans and wishes to hedge against a possible decline in the spot or cash price at delivery, the farmer could

sell forward or futures contracts in a size equal to the amount of the soybeans expected to be harvested

your customer is long 10 ABC Jul 50 calls at 4.50. How many shares of stock will change hands if the option is exercised?

1,000