60 Questions
What is the payoff to the call buyer at expiration if the price of the underlying asset is below the exercise price?
Max(0, ST - X)
Which party pays a sum of money to receive the right to either buy or sell an underlying asset at a fixed price in an option contract?
Option buyer
If the price of the underlying asset is greater than the exercise price at expiration, who is 'in the money' for a call option?
Option buyer
What is the payoff to the put seller at expiration if the exercise price is higher than the price of the underlying asset?
- Max(0, X - ST)
When considering a call option, what does 'ST - X > 0' indicate?
The option is in-the-money
What is the main difference between a futures contract and an option contract?
Futures contracts lock in the price of the asset and do not allow for any upside potential, whereas options hedge negative price movements and allow for upside potential.
What is the motivation for hedgers to use options?
To control or eliminate financial exposures while allowing for upside potential.
Which type of trader seeks to earn riskless profits through the discovery of mispriced securities?
Arbitrageurs
What is the main advantage of options over futures in terms of payoffs?
Options hedge negative price movements and allow for upside potential.
What does a put option holder have the right to do?
Sell at a certain price.
What is the profit earned by selling 100 shares at $1000 each after buying them at $880 per share?
$12000
In the context of selling a Put option, if an investor sells one September put option contract on Google with a strike price of $840, what amount does the investor receive when multiplying the bid price by the number of shares?
$3100
In the scenario where the share price of Google is greater than $840, what happens to the put option?
It expires worthless
When selling a put option, is the transaction done at the bid or offer price?
Bid
For an option seller, what is the payment required when selling a put option?
No payment required
What is the main difference between futures and forward contracts?
Futures contracts have standardized features and are exchange-traded, while forward contracts have customized features and are traded OTC.
Which statement about a short forward position is true?
The short position has an unlimited loss potential if the underlying price increases significantly.
What happens to gains and losses in futures contracts at maturity?
Gains and losses are settled daily through marking to market.
What is the essential difference between a call option buyer and a put option seller?
The call option buyer has the right but not the obligation to buy, while the put option seller has the obligation to sell.
Which statement describes an option seller's position accurately?
An option seller can face unlimited losses if the market price moves against their position significantly.
What is the price of a 2-month call option with a strike of 25 if the current stock price is $20?
$5
In options trading, what is a common risk traders face related to leverage?
Small changes in asset prices leading to large swings in equity
What can happen when traders switch from being hedgers to speculators?
Change in intended use of derivatives
What is the value of a commodity that can be controlled with a futures contract on 50000 gallons of oil at $2 per gallon?
$150,000
What percentage change in the price of heating oil leads to an 8.4% change in equity due to leverage?
1%
What type of market are organised exchanges like the Chicago Board Options Exchange (CBOE)?
Regulated market
In which way do traders in the OTC market usually execute transactions?
Directly over the phone
What role did banks play in the OTC market prior to 2008?
Market makers
What is the function of a central counterparty (CCP) in a transaction?
Stand between the two sides of the transaction
Which statement best describes the OTC market since 2008?
It has become regulated
What happens to the stock price in an arbitrage opportunity?
It quickly returns to equilibrium
What is the purpose of hedging using a long position in a forward contract?
To lock in a future purchase price
In the context of options, what does 'put' represent?
The right to sell an asset at a fixed price
What is the payoff to the call buyer at expiration if the price of the underlying asset is above the exercise price?
$ST
What is the payoff to the put seller at expiration if the exercise price is lower than the price of the underlying asset?
$0
Who is considered 'in the money' for a put option if the exercise price is higher than the price of the underlying asset at expiration?
The option seller
What does 'ST - X < 0' indicate for a call option holder at expiration?
'Out of the money' condition
When would a call option buyer face a loss at expiration?
If ST < X
'ST - X > 0' indicates what for a put option holder at expiration?
'Out of the money' condition
'ST - X = 0' represents which situation for an option holder?
'At the money' condition
What is a crucial requirement for a sale to take place?
Subject of the sale
In a sale, what must be agreed upon along with the subject of the sale?
Date and place of delivery
What is a key element that must be mutually agreed upon in a sale transaction?
Time of payment
What is necessary to finalize a sale according to the text?
Free consent of both parties
In a sale, why is mutual consent between seller and buyer important?
For a smooth transaction process
What is the main difference between an Ijar and a Bai’ contract?
In Ijar, only the usufruct of the asset is traded, while in Bai’ the corpus is transferred
What determines the rent in an Ijara contract?
The aggregate cost incurred in purchasing or installing the asset
What happens if the leased asset in an Ijara contract becomes unusable?
The contract is terminated
What is the liability of the lessee in an Ijara contract?
Liability for use-related damages only
How is rent typically adjusted in a long-term Ijara lease?
Rent is tied to a variable reference rate or benchmark
What happens if the lessee stops using the asset in an Ijara contract without the lessor's consent?
Accrual of rental payments continues
What is a key feature of Ijar contracts that sets them apart from sales contracts?
Time-bound nature with no immediate ownership transfer
How do Shariah scholars suggest benchmarking rent in an Ijara contract?
Tying rent to inflation rates or price indexes
What protects both parties in an Ijara contract when determining rent?
A ceiling or limit on rent increase tied to a reference rate
What is the main distinction between Ijara and Bai’ contracts?
In Bai’ contracts, ownership of the asset is transferred, while in Ijara only the usufruct is traded.
What happens if a leased asset in an Ijara contract becomes damaged beyond usability?
The contract is terminated.
How do Shariah Scholars propose benchmarking rent in long-term Ijara leases?
Linking rent to a variable reference rate or benchmark.
What is the main liability of the lessee in an Ijara contract?
Paying rent as a debt.
How can the rent be adjusted in a long-term Ijara lease?
By tying rent to variable reference rates or benchmarks.
What happens if a lessee stops using the asset in an Ijara contract without lessor consent?
The rental accrual continues despite non-use by the lessee.
Test your knowledge about how derivatives are traded, including on organised exchanges like CBOE, through open outcry systems, electronic trading, and over-the-counter markets. Explore different aspects of financial transactions involving embedded derivatives and the real options approach to assessing capital investments.
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