Unit 4 - Quizzes and Exam

C) going short soybean forwards.

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 long soybean forwards. B) going short soybean futures. C) going short soybean forwards. D) going long soybean futures.

D) unlimited loss.

Derivatives can serve many purposes. However, investors should be aware that there are positions which can result in A) generation of income. B) asset protection. C) potential gains. D) unlimited loss.

A) Forward contracts

For which of the following is there no active secondary market? A) Forward contracts B) ETFs C) Options D) Futures contracts

A) Forward contracts

For which of the following is there no active secondary market? A) Forward contracts B) Futures contracts C) ETFs D) Options

D) I and III

In general, the value of a derivative is primarily determined by which of the following? The price volatility of the underlying asset The exchange on which it is traded The length of time until the contract expires Whether it is purchased from a broker or a dealer A) III and IV B) I and II C) II and III D) I and III

B) I and II

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 which of these risks? Liquidity Creditworthiness of the buyer Lack of assurance that the delivery price will remain stable Location for the delivery may change A) I and IV B) I and II C) III and IV D) II and III

B) Selling a put

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

A) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period.

Which of the following definitions involving derivatives is inaccurate? A) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period. B) An option writer is the seller of an option. C) A long straddle consists of a long call and a long put on the same underlying stock with the same strike price and the same expiration date. D) The seller of a put option has a neutral outlook.

D) can only be exercised on its expiration date.

A European-style option differs from an American-style option primarily in that it A) is generally offered with a limited number of expiration dates. B) is primarily used for options on foreign securities. C) derives its value from some underlying asset. D) can only be exercised on its expiration date.

D) has a $50 loss.

A commodities speculator purchases a 1,000-bushel wheat futures contract at $0.50 per bushel. At expiration, the settlement price is $0.45 per bushel. This individual A) effectively hedged the long wheat position. B) must make delivery of the wheat. C) has a $50 gain. D) has a $50 loss.

A) Forwards

A purchaser of which of the following investments has an obligation? A) Forwards B) Stock rights C) Warrants D) Options

B) the market price of the stock is below the strike price.

An investor would exercise a put option when A) the current premium is higher than the initial cost. B) the market price of the stock is below the strike price. C) the market price of the stock is above the strike price. D) the market price of the stock is equal to the strike price.

A) participate in additional gains if the security continues to increase in price.

Buying a put option on a security one currently owns 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.

B) A call option

Exercise of which of the following would not result in a change on the issuer's balance sheet? A) Convertible preferred stock B) A call option C) Rights D) Warrants

B) purchasing a straddle on that stock.

An investor who was sure that a stock's price was going to move substantially but wasn't sure in which direction would be able to benefit by A) purchasing the stock and a put on the stock. B) purchasing a straddle on that stock. C) selling the stock short and purchasing a call on the stock. D) writing a straddle on that stock.

C) I and IV

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. A) I and III B) II and IV C) I and IV D) II and III

C) buy 1 RIF call.

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

A) generating income.

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) generating income. B) participating in the growth of the company. C) increasing the dividend return. D) protecting the premium.

D) take a short position in wheat futures.

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

C) I and II

Nonsecurities derivatives would include which of these? Forward contracts Futures contracts Hedge funds REITs A) I, II, and IV B) I, II, and III C) I and II D) I and IV

D) Unit investment trust

Which of the following is not considered a derivative? A) Futures contract B) Warrant C) Call option D) Unit investment trust

A) receives the premium.

The writer of a call option A) receives the premium. B) pays the premium. C) has the right to sell the underlying asset. D) is obligated to buy the underlying asset.

A) Warrants are often issued with other securities to make the offering more attractive.

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 give the holder a perpetual interest in the issuer's stock. C) Warrants are safer than corporate bonds. D) Warrants' terms are generally shorter than rights' terms.

C) the market price.

With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the time for delivery. B) the quality. C) the market price. D) the quantity.

B) a long hedge.

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next six months. The best strategy to employ would probably be A) a short hedge. B) a long hedge. C) a neutral hedge. D) a trimmed hedge.

D) completing a futures contract requires the delivery of the commodity.

All of the following statements regarding futures contracts are correct except A) purchasing a contract for future delivery is considered taking a long position. B) futures contracts can be written on financial assets or commodities. C) a short position will increase in value if the underlying commodity or asset declines in value. D) completing a futures contract requires the delivery of the commodity.

B) $300.

If a call option with an exercise price of $50 is purchased for $300, the maximum amount the investor can lose is A) $5,000. B) $300. C) unlimited. D) $4,700.

A) buying puts

If your customer owns 100 shares of a volatile stock and wants to limit downside risk, you may recommend A) buying puts B) shorting the same stock C) writing calls and selling puts D) buying calls

A) derivative.

The term used to describe investment vehicles whose value is based on an underlying asset is A) derivative. B) parity. C) funded debt. D) separate account.

B) Forward contracts

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

D) A futures contract has standardized terms.

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

A) receives the premium.

The writer of a call option A) receives the premium. B) is obligated to buy the underlying asset. C) has the right to sell the underlying asset. D) pays the premium.

D) $59.50

An investor buys five 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 as follows: Trade Amount Commission Rate≤ $2,500$35 + 0.9% of trade amount $2,501-$11,999 $35 + 0.7% of trade amount ≥ $12,000$35 + 0.5% of trade amount Using the information provided, what is the total commission cost for this trade? A) $297.50 B) $199.50 C) $39.90 D) $59.50

D) $300.

If a call option with an exercise price of $50 is purchased for $300, the maximum amount the investor can lose is A) $4,700. B) unlimited. C) $5,000. D) $300.

D) preemptive rights.

One of the privileges frequently offered to holders of common stock is A) warrants. B) call options. C) put options. D) preemptive rights.

C) take a short position in wheat futures.

News reports indicate that the wheat crop scheduled to be harvested in three 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 stock short. C) take a short position in wheat futures. D) grow corn instead.

B) are rarely exercised, while forwards generally are.

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts A) are nonstandardized, while forwards are. B) are rarely exercised, while forwards generally are. C) are preferred to forwards by producers. D) are not regulated by the CFTC, while forwards are.

B) Buy an XYZ March 50 call option.

You have a client who is bullish on XYZ stock and currently owns 100 shares that last traded at $50. He has a CD coming due in March, six months from now, and is afraid that by the time those funds are available, XYZ will have shot up in price. How can he ensure that he'll be able to pick up the stock at today's price six months from now and not miss out on that market appreciation? A) Sell an XYZ March 50 put option. B) Buy an XYZ March 50 call option. C) Buy an XYZ March 50 put option. D) Buy XYZ stock rights.

C) Buy a call option.

Kurt expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following would be the best option strategy for Kurt? A) Sell a put option. B) Buy a put option. C) Buy a call option. D) Sell a call option.

C) Warrants

The term derivative would apply to which of the following? A) UITs B) REITs C) Warrants D) DPPs

A) warrants.

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

B) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period.

Which of the following definitions involving derivatives is inaccurate? A) An option writer is the seller of an option. B) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period. C) A long straddle consists of a long call and a long put on the same underlying stock with the same strike price and the same expiration date. D) The seller of a put option has a neutral outlook.

A) A privilege extended to existing holders of a company's common stock enabling them to maintain their proportionate interest in the company when additional shares are issued

Which of the following statements best describes a preemptive right? A) A privilege extended to existing holders of a company's common stock enabling them to maintain their proportionate interest in the company when additional shares are issued B) A privilege extended to existing holders of a company's common stock enabling them to sell their shares when additional shares are issued C) The right given to existing holders of a company's stock enabling them to vote ahead of preferred stockholders D) The right given to existing holders of a company's stock enabling them to receive dividends in proportion to their equity in the company

C) A privilege extended to existing holders of a company's common stock enabling them to maintain their proportionate interest in the company when additional shares are issued

Which of the following statements best describes a preemptive right? A) A privilege extended to existing holders of a company's common stock enabling them to sell their shares when additional shares are issued B) The right given to existing holders of a company's stock enabling them to receive dividends in proportion to their equity in the company C) A privilege extended to existing holders of a company's common stock enabling them to maintain their proportionate interest in the company when additional shares are issued D) The right given to existing holders of a company's stock enabling them to vote ahead of preferred stockholders