Unit 2: Session 5: Types & Characteristics of Derivative Securities

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

$2.25

Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD) A)at or before the mailing of the confirmation representing the first options trade B)at or before account approval C)at or before the mailing of the next monthly statement D)within 15 days of account approval

B

The use of futures to hedge against a price increase is best referred to as A)a trimmed hedge B)a long hedge C)a neutral hedge D)a short hedge

B

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

A

Writing an option provides all of the following EXCEPT: A)maximum protection against loss. B)income. C)hedging. D)limited downside protection when long the underlying asset.

A

Among the benefits of purchasing derivatives would be: - leverage. - increased income. - unlimited potential gain. - protection against loss.

1, 3, 4

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.

1 & 2

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

1 & 2

Which of the following statements is most accurate when describing equity straddle options? - The option buyer is looking for market volatility. - The option buyer is looking for market stability. - The option seller is looking for market volatility. - The option seller is looking for market stability.

1 & 4

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened? A)Options B)Margin C)Discretionary D)Retirement

A

An investor who is long XYZ stock would consider going long an XYZ call to: A)protect against an increase in the market price of XYZ stock. B)protect against a decrease in the market price of XYZ stock. C)hedge the long position. D)obtain income from the premium.

A

A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably A)take a long position in corn futures B)take a long position in orange juice futures C)take a long position in corn forwards D)take a short position in corn futures

A - A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one. So, why not the long forwards? Those who purchase forwards contracts anticipate accepting delivery of the asset. This individual is merely speculating and has no interest in taking physical possession of the commodity and paying for transportation, silage, and insurance until the commodity is sold. If the person in the question had been a user of corn (a cereal maker, for example), then the forward contract would have been a better choice.

Different types of accounts have different times for receipt of customer information. Which of the following correctly state the required time for the specified account? - Discretionary account authorization must be received by a broker-dealer before exercising discretion. - Margin account agreements must be received promptly after the first trade in the account. - Discretionary account authorization must be received by an investment adviser within 10 business days after the initial discretionary trade. - The options account agreement must be received within 15 days after the customer's account has been approved.

All 4

Which of the following actions should be taken by an agent when a client decides to open an options account? A)Provide an options disclosure document no later than 15 days after the first trade B)Review with the client the risks involved when trading options before the first options trade C)Assure that an options agreement has been signed prior to the first trade takes place D)Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade

B

A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A)going short soybean futures B)going long soybean forwards C)going short soybean forwards D)going long soybean futures

C

Although all new accounts must be approved by a designated supervisory before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A)a margin account B)a discretionary account C)an options account D)an IRA

C

Many savvy investors use options as portfolio insurance. An example of this would be which of the following positions? A)Short in the put, short in the stock. B)Long in the put, short in the stock. C)Long in the put, long in the stock. D)Short in the put, long in the stock.

C

Which of the following strategies would be considered most risky in a bull market? A)Buying calls. B)Buying a put. C)Writing naked calls. D)Writing naked puts.

C

An investor who is long XYZ stock would consider going long an XYZ call to: A)obtain income from the premium. B)protect against a decrease in the market price of XYZ stock. C)Hedge the long position. D)protect against an increase in the market price of XYZ stock.

D

When does a customer have to receive the OCC Options Disclosure Document? A)With the confirmation of his first options transaction B)Within 15 days of account approval C)Within 5 business days of the first options trade D)At or prior to the time the account is approved for options trading

D

When does a customer have to receive the OCC Options Disclosure Document? A)With the confirmation of the first options transaction B)Within 5 business days of the first options trade C)Within 15 days of account approval by the firm's designated options supervisor D)Before accepting the customer's first order to trade options covered by the ODD

D

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires, A)only the Exchange is obligated to perform B)only the seller is obligated to perform C)only the buyer is obligated to perform D)both the buyer and seller are obligated to perform

D - Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract. At expiration date, if not exercised before, the buyer must purchase at the contract price and the seller must deliver at the contract price. In the case of options, the buyer (long position) is the one who chooses to exercise or not, and it is the seller (short position) who becomes obligated to perform.