Unit 16

If a call option with an exercise price of $50 is purchased for $300, the maximum amount the investor can lose is

$300

what are the two most importatn factors influencing the price of a derivative

1. price movement 2. length on contract

what are the 3 standarzied items

1. underlying asset (100 shares) 2. exercise or strike price 3. the expiration date

What has no active secondary market?

Forward Contracts

what type of market is a short stock

bearish

what type of market is a long stock

bullish

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

buy a call

what is the best way to hedge a short position

buying a call option on a stock you are already short

which has standardized terms futures or forwards

futures

the longer the time for a derivated the ___

greater the time value

an investor who is long a put option for 100 shares of ABC common stock

has the right to sell 100 shares at the stated exercise price

those who sell (write) a straddle witth profit from what

if the market is stable

Buying a put option on a security he holds allows the investor to do what

particapte in a additonal gains if the securitiy continues to increase in price.

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

purchasing a straddle on that stock

the writer of a call option

recieves a premium

Traders in stock index options are exposed to

systematic risk

those who buy a straddle will profit from what

volatility

An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to:

sell a call

George owns XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. What should he do

sell a call option