Derivatives Trading Methods Quiz

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What is the payoff to the call buyer at expiration if the price of the underlying asset is below the exercise price?

ST - X

Max(0, ST - X) (correct)

Max(0, X - ST)

X - ST

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 (correct)

Futures seller

Futures buyer

Option seller

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 seller

Neither

Option buyer (correct)

Both

What is the payoff to the put seller at expiration if the exercise price is higher than the price of the underlying asset?

<ul> <li>Max(0, X - ST)</li> </ul> Signup and view all the answers

When considering a call option, what does 'ST - X > 0' indicate?

The option is in-the-money Signup and view all the answers

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. Signup and view all the answers

What is the motivation for hedgers to use options?

To control or eliminate financial exposures while allowing for upside potential. Signup and view all the answers

Which type of trader seeks to earn riskless profits through the discovery of mispriced securities?

Arbitrageurs Signup and view all the answers

What is the main advantage of options over futures in terms of payoffs?

Options hedge negative price movements and allow for upside potential. Signup and view all the answers

What does a put option holder have the right to do?

Sell at a certain price. Signup and view all the answers

What is the profit earned by selling 100 shares at $1000 each after buying them at $880 per share?

$12000 Signup and view all the answers

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 Signup and view all the answers

In the scenario where the share price of Google is greater than $840, what happens to the put option?

It expires worthless Signup and view all the answers

When selling a put option, is the transaction done at the bid or offer price?

Bid Signup and view all the answers

For an option seller, what is the payment required when selling a put option?

No payment required Signup and view all the answers

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. Signup and view all the answers

Which statement about a short forward position is true?

The short position has an unlimited loss potential if the underlying price increases significantly. Signup and view all the answers

What happens to gains and losses in futures contracts at maturity?

Gains and losses are settled daily through marking to market. Signup and view all the answers

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. Signup and view all the answers

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. Signup and view all the answers

What is the price of a 2-month call option with a strike of 25 if the current stock price is $20?

$5 Signup and view all the answers

In options trading, what is a common risk traders face related to leverage?

Small changes in asset prices leading to large swings in equity Signup and view all the answers

What can happen when traders switch from being hedgers to speculators?

Change in intended use of derivatives Signup and view all the answers

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 Signup and view all the answers

What percentage change in the price of heating oil leads to an 8.4% change in equity due to leverage?

1% Signup and view all the answers

What type of market are organised exchanges like the Chicago Board Options Exchange (CBOE)?

Regulated market Signup and view all the answers

In which way do traders in the OTC market usually execute transactions?

Directly over the phone Signup and view all the answers

What role did banks play in the OTC market prior to 2008?

Market makers Signup and view all the answers

What is the function of a central counterparty (CCP) in a transaction?

Stand between the two sides of the transaction Signup and view all the answers

Which statement best describes the OTC market since 2008?

It has become regulated Signup and view all the answers

What happens to the stock price in an arbitrage opportunity?

It quickly returns to equilibrium Signup and view all the answers

What is the purpose of hedging using a long position in a forward contract?

To lock in a future purchase price Signup and view all the answers

In the context of options, what does 'put' represent?

The right to sell an asset at a fixed price Signup and view all the answers

What is the payoff to the call buyer at expiration if the price of the underlying asset is above the exercise price?

$ST Signup and view all the answers

What is the payoff to the put seller at expiration if the exercise price is lower than the price of the underlying asset?

$0 Signup and view all the answers

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 Signup and view all the answers

What does 'ST - X < 0' indicate for a call option holder at expiration?

'Out of the money' condition Signup and view all the answers

When would a call option buyer face a loss at expiration?

If ST < X Signup and view all the answers

'ST - X > 0' indicates what for a put option holder at expiration?

'Out of the money' condition Signup and view all the answers

'ST - X = 0' represents which situation for an option holder?

'At the money' condition Signup and view all the answers

What is a crucial requirement for a sale to take place?

Subject of the sale Signup and view all the answers

In a sale, what must be agreed upon along with the subject of the sale?

Date and place of delivery Signup and view all the answers

What is a key element that must be mutually agreed upon in a sale transaction?

Time of payment Signup and view all the answers

What is necessary to finalize a sale according to the text?

Free consent of both parties Signup and view all the answers

In a sale, why is mutual consent between seller and buyer important?

For a smooth transaction process Signup and view all the answers

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 Signup and view all the answers

What determines the rent in an Ijara contract?

The aggregate cost incurred in purchasing or installing the asset Signup and view all the answers

What happens if the leased asset in an Ijara contract becomes unusable?

The contract is terminated Signup and view all the answers

What is the liability of the lessee in an Ijara contract?

Liability for use-related damages only Signup and view all the answers

How is rent typically adjusted in a long-term Ijara lease?

Rent is tied to a variable reference rate or benchmark Signup and view all the answers

What happens if the lessee stops using the asset in an Ijara contract without the lessor's consent?

Accrual of rental payments continues Signup and view all the answers

What is a key feature of Ijar contracts that sets them apart from sales contracts?

Time-bound nature with no immediate ownership transfer Signup and view all the answers

How do Shariah scholars suggest benchmarking rent in an Ijara contract?

Tying rent to inflation rates or price indexes Signup and view all the answers

What protects both parties in an Ijara contract when determining rent?

A ceiling or limit on rent increase tied to a reference rate Signup and view all the answers

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. Signup and view all the answers

What happens if a leased asset in an Ijara contract becomes damaged beyond usability?

The contract is terminated. Signup and view all the answers

How do Shariah Scholars propose benchmarking rent in long-term Ijara leases?

Linking rent to a variable reference rate or benchmark. Signup and view all the answers

What is the main liability of the lessee in an Ijara contract?

Paying rent as a debt. Signup and view all the answers

How can the rent be adjusted in a long-term Ijara lease?

By tying rent to variable reference rates or benchmarks. Signup and view all the answers

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. Signup and view all the answers