Financial Derivatives: American Style Options
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Questions and Answers

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?

    <p>Economic observer perspective</p> Signup and view all the answers

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

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

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

    <p>Arbitrageur</p> Signup and view all the answers

    What is the primary characteristic of a call option?

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

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

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

    What happens when a futures contract is closed before expiry?

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

    What is the primary feature of an option contract?

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

    What is the purpose of a put option?

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

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

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

    What is a characteristic of American style options?

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

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

    <p>To guarantee the performance of the contract.</p> Signup and view all the answers

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

    <p>The underlying asset being exchanged.</p> Signup and view all the answers

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

    <p>Exercise price</p> Signup and view all the answers

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

    <p>Option writer</p> Signup and view all the answers

    What is the purpose of a swap agreement?

    <p>To exchange cash flows at regular intervals.</p> Signup and view all the answers

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