Deck 2: Structure of Options Markets

Question 1

If the initial margin is $5,000,the maintenance margin is $3,500 and your balance is $4,000,how much must you deposit?

A)nothing
B)$6,000
C)$1,500
D)$9,000
E)none of the above

Answer 1

A

Question 2

If an investor exercises a cash settled derivative,

A)the transaction entails only a bookkeeping entry
B)must purchase the underlying instrument from the writer
C)immediately buy a put option to offset the call option
D)immediately write another call option to offset
E)none of the above

Answer 2

A

Question 3

A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at

A)$2
B)$32
C)$33
D)$35
E)none of the above

Answer 3

D

Question 4

The option price is also referred to as the

A)strike
B)spread
C)premium
D)fee
E)none of the above

Question 5

The number of options acquired when one contract is purchased on an exchange is

A)1
B)5
C)100
D)500
E)8,000

Question 6

Which of the following organizations has the ultimate regulatory authority in the futures industry?

A)National Futures Association
B)Commodity Futures Trading Commission
C)Commodity Exchange Authority
D)Securities and Exchange Commission
E)none of the above

Question 7

If the market maker will buy at 4 and sell at 4.50,the bid-ask spread is

A)8.50
B)4.25
C)0.50
D)4.00
E)none of the above

Question 8

All of the following are forms of options except

A)convertible bonds
B)callable bonds
C)puttable bonds
D)mutual funds
E)none of the above

Question 9

An investor who owns a call option can close out the position by any of the following types of transactions except

A)exercise
B)offset
C)expiring out-of-the-money
D)buying a put
E)none of the above

Question 10

Identify the true statement regarding the largest derivatives exchanges.

A)CME Group is one of the top five largest derivatives exchange,based on volume
B)Intercontinental Exchange is one of the top five largest derivatives exchange,based on volume
C)The volume of trading exceeded one billion on each of the top five derivatives exchanges
D)Among the top 20 derivatives exchanges,several different continents are represented
E)all of the above

Question 11

The exercise price can be set at any desired level on each of the following types of options except

A)FLEX options
B)equity options
C)over-the-counter options
D)all of the above
E)none of the above

Question 12

Which of the following contract terms is not set by the futures exchange?

A)the dates on which delivery can occur
B)the expiration months
C)the price
D)the deliverable commodities
E)the size of the contract

Question 13

A writer selected to exercise an option is said to be

A)marginal
B)assigned
C)restricted
D)designated
E)none of the above

Question 14

Organized options markets are different from over-the-counter options markets for all of the following reasons except

A)exercise terms
B)physical trading floor
C)regulation
D)standardized contracts
E)credit risk

Question 15

Which of the following is not the task of market makers?

A)provide liquidity
B)offer to buy and sell
C)provide price transparency
D)work as a sole specialist
E)none of the above

Question 16

A put option in which the stock price is $60 and the exercise price is $65 is said to be

A)in-the-money
B)out-of-the-money
C)at-the-money
D)exercisable
E)none of the above

Question 17

The advantages of the over-the-counter options market include all of the following except

A)customized contracts
B)privately executed
C)freedom from government regulation
D)lower prices
E)none of the above

Question 18

Which one of the following is not a type of transaction cost in options trading?

A)all of the above
B)the bid-ask spread
C)the commission
D)clearing fees
E)the cost of obtaining a quote

Question 19

Which of the following is a legitimate type of option order on the exchange?

A)purchase order
B)limit order
C)execution order
D)floor order
E)all of the above

Question 20

The derivatives exchange with the largest trading volume is the

A)Moscow Exchange
B)Nasdaq OMX
C)CME Group
D)Pacific Stock Exchange
E)National Stock Exchange of India

Question 21

Where did the U.S.futures market originate?

A)Kansas
B)New York
C)Minneapolis
D)Chicago
E)none of the above

Question 22

Which of the following duties is not performed by the clearinghouse?

A)holding margin deposits
B)guaranteeing performance of buyer and writer
C)maintaining records of transactions
D)lending money to meet margin requirements
E)none of the above

Question 23

A limit move is when a futures price reaches its all time high or low price.

Question 24

Position limits are restrictions on the number of transactions an investor can execute on a given day.

Question 25

An out-of-the-money call option has an exercise price less than the stock price.

Question 26

Credit risk is handled in forward markets by daily marking-to-market.

Question 27

A put option increases in value when the stock price decreases.

Question 28

Exercise limits are restrictions on the number of options that can be exercised by an investor in a given day or series of days.

Question 29

When futures accounts are marked-to-market,an account balance below the maintenance margin must be brought up to the initial margin.

Question 30

The exercise price is also called the striking price.

Question 31

The Put and Call Brokers and Dealers Association created the first organized options exchange.

Question 32

What are circuit breakers?

A)rules that stop trading when futures are about to expire
B)a system that shuts down the exchange computer during periods of abnormal volume
C)limits on the number of contracts that can be traded on high volume days
D)rules that limit the number of contracts a speculator can hold
E)none of the above

Question 33

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound.If the initial margin is $2,525 and the maintenance margin is $1,000,at what price would there be a margin call?

A)31.91
B)32.11
C)31.29
D)31.09
E)31.80

Question 34

Individuals engaging in this type of trading strategy are characterized by their attempt to profit from guessing the direction of the market

A)hedgers
B)spreaders
C)speculators
D)arbitraguers
E)none of the above

Question 35

One of the advantages of forward markets is

A)performance is guaranteed by the G-30
B)trading is less costly and governed by more rules
C)none of the above
D)trading is conducted in the evening over computers
E)the contracts are private and customized

Question 36

Futures contracts are similar to forward contracts because they both represent a

Question 37

The over-the-counter options market is much larger than the exchange-listed options market.

Question 38

Despite the fact that forward contracts carry more credit risk than futures contracts,forward contracts offer what primary advantage over futures contracts?

A)the over-the-counter forward market is a highly regulated market
B)forward contracts prevent the writer from assuming the credit risk of the buyer
C)terms and conditions are tailored to the specific needs of the two parties involved
D)transaction information between the two parties involved in the forward contract is readily available to the public
E)conditions of the forward contract,such as delivery date and location,cannot be altered

Question 39

A market maker is an options trader who buys and sells options off of the exchange floor.

Question 40

Variation margin is which of the following?

A)margin deposited as a result of marking-to-market
B)the difference in margin between hedger and speculator
C)margin differences according to trading style
D)margin set by the variability of a futures price
E)none of the above

Question 41

The spread between the bid price and the ask price is a transaction cost to the option trader.

Question 42

Options traders who hold their positions for very short periods of time are called position traders.

Question 43

The majority of derivatives exchanges in the U.S.are fully automated.

Question 44

Over-the-counter options are not subject to default.

Question 45

An order placed by an investor for the broker to buy an option at the best available price is called a market order.

Question 46

CBOE option market makers are also called liquidity providers.

Question 47

Over-the-counter options dealers do not have to be members of an options exchange.

Question 48

The bid price is the price paid to buy an option from a market maker.

Question 49

A hedge fund is a very risky form of investment.

Question 50

Most investors close their positions by exercising their options.

Question 51

Each futures contract has both a long and a short position and counts as only one unit of open interest.

Question 52

A market maker always avoids the cost of the bid-ask spread.

Question 53

The options market is regulated by the Securities Investor Protection Corporation.

Question 54

Offsetting an over-the-counter option contract cancels both contracts.

Question 55

Option commissions are set by the Chicago Board Options Exchange.

Question 56

The daily settlement procedure is a major similarity between futures contracts and forward contracts.

Question 57

The Options Clearing Corporation guarantees the obligations of traders on many options exchanges.

Question 58

The number of option contracts outstanding at any given time is called the open interest.

Question 59

One party to a forward transaction does not bear the risk that the other party will default.

Question 60

Indices measuring options market activity are simple to construct and widely quoted.

Question 61

An investor who is long an over-the-counter call option is exposed to the risk that the call writer will default on her obligations should the call option end up in-the-money.

Question 62

The largest futures exchange in the United States is the EMC Group.

Question 63

Exercising a stock put option means the put seller must sell stock at the stated strike price.