Series 66 - Unit 16

One of the disadvantages when investing in forward contracts is that there is

no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.

short has the

obligation to sell (call) and obligation to buy (put)

Because forwards are generally delivered, they are the preferred tool by

producers and it is futures which are standardized and CFTC regulates, not forwards.

In almost all cases, the holder of the futures contract will

purchase an offsetting contract canceling the original position or sell the contract prior to expiration.

Specified in an exchange-traded futures contract would be the quantity of the underlying asset the quality of the underlying asset the time of delivery of the underlying asset the location of delivery of the underlying asset

the quantity of the underlying asset the quality of the underlying asset the time of delivery of the underlying asset the location of delivery of the underlying asset

bc futures are not securities,

they do not come under jurisdcition of the SEC

Rights offerings are usually

very short-lived (30 to 45 days).

Which type of contract obligates both parties to act? Forward contract Futures contract Option contract Warrant

Forward contract Futures contract It is only in the case of forward and futures contracts that both parties are obligated to fulfill the terms of the contract. Only the seller of an option contract is obligated, and in the case of a warrant, it is the issuer of the warrant who is obligated to deliver the underlying shares if the owner exercises.

owner (long position) of a put or call has three ways to close a position

- sell the option before expiration - excercise - let expire

An investor buys 5 put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is shown as follows: Trade Amount Commission Rate ≤ $2,500 $35 + 0.9% of trade $2,501 to $11,999 $35 + 0.7% of trade ≥ $12,000$35 + 0.5% of trade amount Using the information above, what is the total commission cost based for this trade?

$59.50 The cost per contract is $7 x 100 shares, or $700. That makes the total trade amount $700 x 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 0.7% of the trade amount. $35 + 0.7% of $3,500 = $35 + $24.50 = $59.50 total charge.

An investor purchases two PMJ Dec 16 calls at $.85. If the commission charge is $8, the total cost is

178 A premium of 85 cents per share means each contract has a cost of $85. There are two of them making that $170. Adding the $8 commission brings the total to $178.

long has the

right to buy (call) and right to sell (put)

SRO that is in charge of regulating futures market

Commodity futures trading commission

Mark's company, which is located in Oregon, makes unfinished wood furniture. His company sells this furniture directly to the public from a large warehouse. Theresa's company, which is located in southern Georgia, grows cotton for t-shirts manufacturers. Which of the following statements correctly identifies hedging strategies for Mark and Theresa? Mark should buy lumber futures. Theresa should sell cotton futures. Mark should sell lumber futures. Theresa should buy cotton futures.

Mark should buy lumber futures. Theresa should sell cotton futures. Mark is "short" lumber because he needs lumber to produce his products. A hedge position for Mark would be to go long lumber futures, that is, to purchase lumber futures. Theresa is "long" cotton because she owns cotton for manufacturing purposes. A hedge position for Theresa is to go short, that is, to sell cotton futures.

Typically, there are 5 standardized parts to an exchange-traded futures contract:

Quantity of the commodity (e.g., 5,000 bushels of corn or 100 oz. of gold) Quality of the commodity (specific grade or range of grades may be acceptable for delivery, including price adjustments for different deliverable grades) Delivery price (similar to exercise or strike price with options) Time for delivery (e.g., December wheat to be delivered) Location (approved for delivery)

Which of the following are characteristics of newly issued warrants?

Time value, but no intrinsic value

European

at expiration date

straddle

- investor not sure which direction the market will move but thinks there will be a strong move one way of the other

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts

are rarely exercised while forwards generally are.

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires,

both the buyer and the seller are obligated to perform

Warrants could be thought of as

call options with a long expiration period.

In the vast majority of the cases, futures contracts are

closed out prior to expiration That is one reason they are more popular with speculators than forwards

how to make a straddle

combining of a put and a call

american

exercise anytime

Futures contracts can be written on

financial assets such as currencies and stock indexes, as well as on commodities such as agricultural products or precious metals.

option contracts offer investors a means to

hedge, or protect and investments value

warrants are always issued with a strike price .

in excess of the current market value, so there is no intrinsic value. One could say that on issuance, they are always out-of-the-money. The only value is in the time to expiration, usually several years or longer

In isolated cases, delivery of the commodity

may be made but is not required.

for futures At expiration date, if not exercised before, the buyer

must purchase at the contract price and the seller must deliver at the contract price.

Among the ways in which futures differ from options is that both parties, long and short, are

obligated to execute the contract.