Financial Derivatives: American Style Options

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Which type of derivative market participant uses derivatives to reduce the risk associated with an underlying asset?

Market-maker

Arbitrageur

Hedger (correct)

Speculator

What is the primary way that market-makers make money?

By speculating on market movements

By selling derivatives at a high price and buying them at a low price (correct)

By hedging their own positions

By charging a commission on each trade

What is the main characteristic of Over-the-Counter (OTC) markets?

They are traded on an exchange

They are privately negotiated and customized (correct)

They are only available to institutional investors

They are standardized contracts

Which perspective focuses on the overall activities of the market and tries to make sense of everything?

Economic observer perspective Signup and view all the answers

What is the primary goal of an end-user when entering into a derivative contract?

To meet a specific goal, such as risk reduction Signup and view all the answers

Which type of derivative market participant uses derivatives to take advantage of mis-pricing in the market?

Arbitrageur Signup and view all the answers

What is the primary characteristic of a call option?

It gives the buyer the right to buy a given quantity of underlying asset at a given price on or before a particular date. Signup and view all the answers

What is the main difference between European and American style options?

European style options can be exercised only on the maturity of the options, while American style options can be exercised before maturity. Signup and view all the answers

What happens when a futures contract is closed before expiry?

The net difference is settled between the traders, without physical delivery of the underlying. Signup and view all the answers

What is the primary feature of an option contract?

The buyer has the right, but not the obligation, to buy or sell the underlying asset. Signup and view all the answers

What is the purpose of a put option?

It gives the buyer the right to sell a given quantity of underlying asset at a given price on or before a particular date. Signup and view all the answers

What is the significance of the expiry date in a futures contract?

It is the last date on which the contract can be settled by delivery. Signup and view all the answers

What is a characteristic of American style options?

They can be exercised at any time prior to the expiration date. Signup and view all the answers

What is the role of the clearing house in an options contract?

To guarantee the performance of the contract. Signup and view all the answers

What is the primary difference between a fixed currency swap and a simple interest rate swap?

The underlying asset being exchanged. Signup and view all the answers

What is the term for the price at which an option is exercised?

Exercise price Signup and view all the answers

What is the term for the person who writes an option?

Option writer Signup and view all the answers

What is the purpose of a swap agreement?

To exchange cash flows at regular intervals. Signup and view all the answers

Financial Derivatives: American Style Options

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