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Questions and Answers
What does a call option give its owner the right to do?
What does a call option give its owner the right to do?
- Sell shares at a fixed exercise price
- Sell shares at the current market price
- Buy shares at the current market price
- Buy shares at a fixed exercise price (correct)
If a stock falls, what happens to the value of the investment for a call option holder?
If a stock falls, what happens to the value of the investment for a call option holder?
- It decreases to zero (correct)
- It increases
- It doubles
- It stays the same
In Tanya's example, what was her profit per share after exercising the call option and selling the shares?
In Tanya's example, what was her profit per share after exercising the call option and selling the shares?
- $5
- $7
- $3 (correct)
- $2
If Tanya had not exercised her call option on XYZ shares, what would have been her loss in this example?
If Tanya had not exercised her call option on XYZ shares, what would have been her loss in this example?
What happens when an investor exercises a call option?
What happens when an investor exercises a call option?
How is the profit on a call option investment calculated?
How is the profit on a call option investment calculated?
What type of security is traded on a stock exchange according to the passage?
What type of security is traded on a stock exchange according to the passage?
What is the role of investment dealers in the government bond market described in the passage?
What is the role of investment dealers in the government bond market described in the passage?
What type of order does the passage describe as allowing an investor to buy or sell a stock at a specific price?
What type of order does the passage describe as allowing an investor to buy or sell a stock at a specific price?
According to the passage, what happens when a limit order is placed on a stock exchange?
According to the passage, what happens when a limit order is placed on a stock exchange?
Which of the following securities is NOT mentioned in the passage as being traded on a stock exchange?
Which of the following securities is NOT mentioned in the passage as being traded on a stock exchange?
What is the primary role of a broker in exchange-based trading?
What is the primary role of a broker in exchange-based trading?
What is the expected return for an investor holding preferred shares?
What is the expected return for an investor holding preferred shares?
Which type of transaction allows an investor to buy securities using borrowed funds?
Which type of transaction allows an investor to buy securities using borrowed funds?
What is the primary role of an underwriter in the securities market?
What is the primary role of an underwriter in the securities market?
What type of security allows investors to speculate on price movements without owning the underlying asset?
What type of security allows investors to speculate on price movements without owning the underlying asset?
Which of the following statements about exchange-traded options is true?
Which of the following statements about exchange-traded options is true?
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Study Notes
Broker's Role in Exchange-Based Trading
- A broker acts as an agent of the investor, not owning the securities at any time during the transactions.
- The broker's profit is the agent's commission charged for each transaction.
Types of Market Transactions
- Simplest type of market transaction is buying or selling a security.
- Fixed-income securities provide regular income and potential capital gains if interest rates fall.
- Common shares are bought for dividend income and capital gains.
Margin Accounts
- A margin account allows clients to buy securities using borrowed money from a stockbroker.
- Clients pay only part of the full price, with the securities firm lending the remainder and charging interest.
- The securities firm grants credit based on the market value and quality of securities in the margin account.
Options Contracts
- A call option gives the owner the right to buy shares at a fixed exercise price prior to the expiration date.
- The owner benefits on a dollar-for-dollar basis with the increase in the stock price, minus the option premium.
- If the stock falls, the owner may lose the entire investment.
Example of a Call Option
- Tanya buys a three-month call option on XYZ shares for $2, giving her the right to buy at $20.
- If the stock price increases to $25, Tanya exercises the option and sells the shares at $25 for a profit of $5 per share.
- If the stock price falls, Tanya loses the $2 premium paid for the call option.
Trading Securities
- Trading of Canadian equity securities takes place on a stock exchange.
- Investors contact their stockbroker to give an order to buy or sell a certain number of shares.
- The order is forwarded electronically to the exchange and can be filled immediately if it's a market order.
Types of Orders
- Market order: an order to buy or sell at the current market price.
- Limit order: an order to buy or sell at a specific price, which is visible to all dealer members in the exchange's consolidated electronic order book.
- When the order is filled, the client receives a confirmation with the transaction details.
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