Podcast
Questions and Answers
What type of option gives the buyer the right to sell the underlying asset?
What type of option gives the buyer the right to sell the underlying asset?
In a European option, the buyer can exercise the option any time before the expiration date.
In a European option, the buyer can exercise the option any time before the expiration date.
False
What is the non-refundable price paid by the buyer to purchase an option called?
What is the non-refundable price paid by the buyer to purchase an option called?
Option Premium
In options trading, the seller faces a potential _____ cash flow if the buyer decides to exercise the option.
In options trading, the seller faces a potential _____ cash flow if the buyer decides to exercise the option.
Signup and view all the answers
Match the following types of options with their characteristics:
Match the following types of options with their characteristics:
Signup and view all the answers
Which statement about options is true?
Which statement about options is true?
Signup and view all the answers
The total cash flow for a buyer of an option is dependent solely on whether the option is exercised.
The total cash flow for a buyer of an option is dependent solely on whether the option is exercised.
Signup and view all the answers
Explain the term 'zero-sum game' in the context of trading options.
Explain the term 'zero-sum game' in the context of trading options.
Signup and view all the answers
What is the cash flow for Ajay if he exercises the call option and the stock price (ST) is 85?
What is the cash flow for Ajay if he exercises the call option and the stock price (ST) is 85?
Signup and view all the answers
Ajay can incur a negative cash flow when exercising his option.
Ajay can incur a negative cash flow when exercising his option.
Signup and view all the answers
What is the maximum profit for the seller of an option?
What is the maximum profit for the seller of an option?
Signup and view all the answers
If Ajay buys a put option at 70 per share, his maximum loss is the premium of _____ per share.
If Ajay buys a put option at 70 per share, his maximum loss is the premium of _____ per share.
Signup and view all the answers
Match the following terms with their definitions:
Match the following terms with their definitions:
Signup and view all the answers
What happens if the stock price (ST) is 60 three months hence?
What happens if the stock price (ST) is 60 three months hence?
Signup and view all the answers
A call option is exercised when ST < X.
A call option is exercised when ST < X.
Signup and view all the answers
What is the cash flow for Vijay if Ajay exercises the put option at a share price of 60?
What is the cash flow for Vijay if Ajay exercises the put option at a share price of 60?
Signup and view all the answers
When will a call option typically be exercised?
When will a call option typically be exercised?
Signup and view all the answers
A put option will always be exercised if the market price is lower than the exercise price.
A put option will always be exercised if the market price is lower than the exercise price.
Signup and view all the answers
What is the formula for profit calculation for put option holders?
What is the formula for profit calculation for put option holders?
Signup and view all the answers
In a zero-sum game, the gain of one party is equal to the ______ of another.
In a zero-sum game, the gain of one party is equal to the ______ of another.
Signup and view all the answers
Match the option types with their definitions:
Match the option types with their definitions:
Signup and view all the answers
Which statement describes the profit for put option writers?
Which statement describes the profit for put option writers?
Signup and view all the answers
A profit of 100*max[0,X-ST] means the option holder is in a losing position.
A profit of 100*max[0,X-ST] means the option holder is in a losing position.
Signup and view all the answers
What is the main characteristic of OTC contracts?
What is the main characteristic of OTC contracts?
Signup and view all the answers
In India, options typically expire on the ______ of the month.
In India, options typically expire on the ______ of the month.
Signup and view all the answers
What happens if a holder of a call option exercises it when ST = 70.45 and X = 70?
What happens if a holder of a call option exercises it when ST = 70.45 and X = 70?
Signup and view all the answers
Sunk costs should be considered when making investment decisions.
Sunk costs should be considered when making investment decisions.
Signup and view all the answers
What do call option holders receive if they exercise their option?
What do call option holders receive if they exercise their option?
Signup and view all the answers
Options trading results in wealth ______ from one party to another.
Options trading results in wealth ______ from one party to another.
Signup and view all the answers
Match the term with its description:
Match the term with its description:
Signup and view all the answers
Study Notes
Futures and Options
- Options and futures both have expiration dates. After this date, the contract is void.
- Options contracts are contingent while futures are commitment contracts. Options give the buyer a right, not an obligation, to act on the contract. Futures contracts obligate both parties to complete the transaction.
- Options can be calls (right to buy) or puts (right to sell).
- European options can only be exercised at expiration.
- American options can be exercised at any time up to the expiration date.
- The option price, or premium, is the price paid by the buyer to the seller.
- Exercising a call option results in a profit for the buyer and a loss for the seller. Profits/losses are zero if the option isn't exercised.
- Options are similar to insurance; the premium is a non-refundable payment.
- Strike price, or exercise price, is the price an asset will be sold or bought at if the call or put is exercised.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers the fundamental concepts of futures and options, highlighting their expiration dates and the nature of contracts. You will learn about the differences between options and futures, the types of options, and the significance of strike prices. Test your understanding of these important financial instruments!
