Unit 16: Types and Characteristics of Derivative Securities

BEARISH

A [BEARISH | BULLISH] investor can speculate on the price decline by buying puts.

income

Among the purposes of purchasing derivatives would be all of the following EXCEPT: A) hedging B) income C) profits D) speculation

a high correlation with stock market returns

Among the reasons for investors to consider investing in real estate would be all of the following EXCEPT A) the ability to increase returns through leverage B) a high correlation with stock market returns C) possible tax advantages D) potential appreciation

II and III

Benefits of investing in DPPs would include I. high liquidity II. flow-through of operation losses III. limited liquidity IV. immunization against tax audit

forward contracts

Commonly traded on a regulated exchange would be any of the following EXCEPT: A) ETFs B) forward contracts C) futures D) warrants

Speculators Producers

Futures are most commonly used by [SPECULATORS | PRODUCES] while forwards are used by [SPECULATORS | PRODUCES].

Equity Options

Standardized options giving the holder the right to buy or sell the underlying common stock at a set price.

REITs

The term derivative wold not include A) futures on commodities B) interest rate swaps C) REITs D) LEAPS

calls and puts

Two types of option contracts?

Call

Type of option gives its holder the right to buy a stock for a specific price within a specified time frame. The buyer in this type of option purchases the right to buy a specific stock, and the seller takes on the obligation to sell the stock.

purchasing selling

[PURCHASING | SELLING] a derivative, whether an option, a forward, or future contracts, never generates income. [PURCHASING | SELLING] one does.

Derivative Securities

financial contracts whose values are derived from the values of underlying assets, such as stock, stock index, interest rate, or foreign currency.

Option

A contract that establishes a price and time frame for the purchase or sale of a particular underlying instrument.

Put

A type of option which gives its holder the right to sell a stock for a specific price within a specified time frame. The buyer in this options purchases the right to sell a specific stock, and the seller takes on the obligation to buy the stock.

sell futures or forward contracts in a size equal to the amount of the soybeans expected to be harvested

Forwards are commonly used by producers (farmers) to hedge the risk of the price of the commodity falling before it is able to be harvested and sold. For example, if a farmer has planted soybeans and wishes to hedge against a possible decline in the spot or cash price at delivery, the farmer could A) buy forward contracts in a size equal to the amount of soybeans expected to be harvested B)buy futures contracts in a size equal to the amount of soybeans expected to be harvested C) sell futures or forward contracts in a size equal to the amount of the soybeans expected to be harvested D) sell the soybeans for cash today

preemtive rights to purchase some of the new shares

GEMCO Manufacturing Company, traded on the NYSE, has announced it will be issuing 10 million new shares of common stock to raise new capital for the purchase of new equipment. Your client owning 1,000 shares of GEMCO common stock would probably receive A) an advance invitation to purchase some of the new shares B) options to purchase some of the new shares C) preemptive rights to purchase some of the new shares D) warrants to purchase some of the new shares

Benefits of writing calls

What do the following have in common in relation to a neutral or bearish investor? - generate income from the option premium - partially protect (hedge) a long stock position by offsetting any loss on the sale of the stock by the premium amount - If the stock price increases, the call may be exercised. In addition to the premium received when the option is sold, the writer will be paid the strike price for the stock.

UP DOWN

You would buy a call because you are hoping (or are afraid) that the price will go [UP | DOWN], and buy a put because you are hoping (or are afraid) that the price will go [UP | DOWN].

1,000

Your customer is long 10 ABC Jul 50 Calls at 4.50. How many shares of stock will change hands if the option is exercised?