unit 16 series 65

You have a client who has sold short 100 shares of RIF, a stock listed on the NYSE. If the client wished to use options to protect against unlimited loss, you would suggest the client A) sell 1 RIF put B) sell 1 RIF call C) buy 1 RIF put D) buy 1 RIF call

D

Many investors with a long position in common stock employ the technique of writing call options on the underlying stock for the purpose of A) protecting the premium B) increasing the dividend return C) participating in the growth of the company D) generating income

D

One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks: Liquidity Creditworthiness of the buyer Lack of assurance that the delivery price will remain stable The location for the delivery may change A) I and IV B) II and III C) III and IV D) I and II

D

Options positions can either create rights or obligations. In which option position has the investor created the possible obligation to purchase stock? A) Purchasing a put B) Purchasing a call C) Selling a call D) Selling a put Explanation

D

The term derivative would apply to all of the following EXCEPT A) options B) futures C) forwards D) hedge funds

D

Which of the following statements is TRUE? A) A futures contract does not involve obligations to buy or sell an asset. B) A futures contract always requires delivery of an asset. C) Unlike forwards, futures are not traded on an exchange. D) A futures contract has standardized terms

D

Which of the following statements regarding warrants is TRUE? A) Warrants are often issued with other securities to make the offering more attractive. B) Warrants' terms are generally shorter than rights' terms. C) Warrants give the holder a perpetual interest in the issuer's stock. D) Warrants are safer than corporate bonds.

A

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be A) $20,000. B) zero because European options are exercisable only at expiration. C) $2,000. D) $4,000.

A

An investor who is long a put option for 100 shares of ABC common stock A) has the right to sell 100 shares at the stated exercise price B) has the right to sell 100 shares at the higher of the exercise or market price C) has the right to buy 100 shares at the stated exercise price D) has the right to buy 100 shares at the lower of the exercise or market price

A

Buying a put option on a security he holds allows an investor to A) participate in additional gains if the security continues to increase in price B) buy more stock if he exercises the put C) receive the premium for the purchase of the put D) increase his profit if the security declines in price

A Purchasing a put allows the stockholder to lock in a sale price. If the price continued to rise, the investor would not exercise the put. He would let it expire and sell the stock at the higher market price thus continuing to participate in the additional gains. If the stock fell the investor would be able to exercise the right to sell the stock at the strike price but that would only offset the loss on the long position, not generate additional profit. Remember that options buyers pay the premium, they do not receive it, and exercising a put gives the holder the right to sell the stock, not buy it.

Exercise of which of the following would NOT result in the money going to the issuer? A) Warrants B) A call option C) Rights D) Convertible preferred stock

B

The term sweetener would most often apply to A) derivatives B) warrants C) rights D) convertibles

B A warrant is a derivative which gives the holder the ability to acquire shares of common stock at a fixed price. At issuance, that price is always higher than the current market value of the stock, but warrants generally have a long expiry date which gives them great time value. When an issuer attaches warrants to a bond or preferred stock issue, they serve to sweeten the offering resulting in lower interest rates or dividends.

The long party is a futures contract that has entered the contract as A) a seller. B) a liquidity provider. C) a buyer. D) a market maker.

C

Which of the following is not traded on any exchange? A) ETFs B) Futures contracts C) Closed-end funds D) Forward contracts

D

A farmer entered into a forward contract to sell his produce at $2.25 per bushel. At the expiration date of the contract, the price was $2.00 per bushel. The farmer would receive A) a price negotiated between the buyer and the seller B) $2.125 per contract C) $2.25 D) $2.00

C

News reports indicate that the wheat crop scheduled to be harvested in 3 months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a long position in wheat futures. B) sell wheat stocks short. C) take a short position in wheat futures. D) grow corn instead.

C A bumper crop means lower prices for the producers (farmers). The appropriate protection is a short hedge - selling wheat futures. Think of it this way - if you thought a stock's price was going to decline, you would sell that stock short. Here, believing that wheat prices will decline, you take a short position in that commodity futures contract. There is no such thing as wheat stock and the wheat has already been planted; it is too late to switch crops.

Which of the following is a multi-option strategy? A) Short call B) Long call C) Protective put D) Straddle

D A straddle consists of a put and a call on the same stock with the same strike price and the same expiration date. If the investor has purchased both options, it is known as a long straddle; if they've both been sold (written), it is known as a short straddle. Therefore, with two option positions, it is a multi-option strategy.