18 Questions
Which type of derivative market participant uses derivatives to reduce the risk associated with an underlying asset?
Hedger
What is the primary way that market-makers make money?
By selling derivatives at a high price and buying them at a low price
What is the main characteristic of Over-the-Counter (OTC) markets?
They are privately negotiated and customized
Which perspective focuses on the overall activities of the market and tries to make sense of everything?
Economic observer perspective
What is the primary goal of an end-user when entering into a derivative contract?
To meet a specific goal, such as risk reduction
Which type of derivative market participant uses derivatives to take advantage of mis-pricing in the market?
Arbitrageur
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.
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.
What happens when a futures contract is closed before expiry?
The net difference is settled between the traders, without physical delivery of the underlying.
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.
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.
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.
What is a characteristic of American style options?
They can be exercised at any time prior to the expiration date.
What is the role of the clearing house in an options contract?
To guarantee the performance of the contract.
What is the primary difference between a fixed currency swap and a simple interest rate swap?
The underlying asset being exchanged.
What is the term for the price at which an option is exercised?
Exercise price
What is the term for the person who writes an option?
Option writer
What is the purpose of a swap agreement?
To exchange cash flows at regular intervals.
Test your understanding of American style options, including their features and characteristics. Learn about the exercise price, option writer, option holder, and premium. See how well you know financial derivatives!
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