options

futures contract

an agreement to buy or sell at a specific date in the future at a predetermined price

forward contract

an arrangement calling for future delivery of an asset at an agreed-upon price

You have taken a stock option position and, if the stock's price increases, you could lose a fixed small amount of money, but if the stock's price decreases, your gain increases. You must have ________________________________.

bought a put option

You would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50. T or F

false

The higher the exercise price, the ________________ the value of a put and the _______________ the value of a call.

lower, higher

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

short position in a futures contract

Call option

the option to buy shares of stock at a specified time in the future

put option

the option to sell shares of stock at a specified time in the future

A negotiated non-standardized agreement between a buyer and seller (with no third-party involvement) to exchange an asset for cash at some future date with the price set today is called a forward agreement. T or F

true

In a futures contract, if funds in the margin account fall below the maintenance margin requirement, a margin call is issued. T or F

true

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price. t or F

true

The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases. T or F

true

Writing a put option results in a potentially limited gain and a potentially unlimited loss. T or F

true

covered call

writing a call on an asset together with buying the asset Losses will be offset by money made on premiums but gains are capped

You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how far prices fall, but you could go bankrupt if the stock's price rises. You have________________________________.

written a call option

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________.

60, 45

Protective put

Buying a stock and a put on the stock to protect the decline of a stock's price; Can be replicated by buying a bond that pays the strike price minus the premium at expiration and a call with the strike price losses are limited at the price paid for premiums but gains are minus the price paid for premiums

Details of a future

Dollar Amount Financial Instrument Specified Price Date of delivery/receipt Obligation to sell/buy

In a bear market, which option positions make money? I. Buying a call II. Writing a call III. Buying a put IV. Writing a put

II and III

A higher level of which of the following variables would make a put option on common stock more valuable, ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price

II and IV