FIN 6100 Exam 4 With Complete Solutions Latest Update
FIN 6100 Exam 4 With Complete
Solutions Latest Update
Derivative - ✔-A contract between two individuals that has cash flows based on the value of some
asset or event
What are derivative contracts? - ✔-Contracts between two individuals or entities.
In a derivative contract, what happens to cash flow between the parties? - ✔-Whatever cash flow one
party gains, the other has to lose an identical amount.
Types of Derivatives - ✔-Forwards, futures, options, swaps
Swaps - ✔-used to trade expenses with another party
Interest Rate Swaps - ✔-can trade fixed payment stream for a variable payment stream or vice versa
Currency Swaps - ✔-can trade expenses owed in a foreign country for no expense owed by a counter
party in domestic country. No need to convert currencies
Options - ✔-contracts that give the owner the right to buy or sell the underlying asset
-Created by investors and sold to other investors
-options expand investment opportunities, lower costs, increase leverage
What are the two forms of options? - ✔-Call options and put options.
What is a call option? - ✔-A call option gives the owner the right to buy an asset at a pre-agreed upon
price by a set date.
FIN 6100 Exam 4 With Complete Solutions Latest Update
,FIN 6100 Exam 4 With Complete Solutions Latest Update
What is a put option? - ✔-A put option gives the owner the right to sell an asset at a pre-agreed upon
price by a set date.
What is a Call Option? - ✔-The option to buy shares of stock at a specified time in the future.
When do investors purchase call options? - ✔-When they expect the underlying security's price to rise.
Exercise price - ✔-The fixed price at which an option holder can buy or sell the underlying. Also called
strike price, striking price, or strike.
Expiration date - ✔-the last day a product is considered fresh; also called maturity; certain date
Option Premium - ✔-price paid by buyer to seller to obtain the right
Put Option - ✔-investors purchase puts if they expect the underlying security's price to fall
How Options Work - ✔--Call buyer/seller expects the price of the underlying security to increase,
decrease, or stay steady
-Put buyer/seller expects the price of the underlying security to decrease, increase, or stay steady
Possible Courses of action:
1. option may expire worthless
2. option may be exercised
3. option may be sold in the secondary market
Option Trading - ✔--exchanges have standardized exercise dates, exercise prices, and contract
quantities (100 shares)
-non-standardized options can be traded over the counter
What is the role of the Options Clearing Corporation? - ✔-An intermediary between buyers and sellers
of options to ensure fulfillment of obligations.
FIN 6100 Exam 4 With Complete Solutions Latest Update
, FIN 6100 Exam 4 With Complete Solutions Latest Update
Who owns the Options Clearing Corporation? - ✔-It is jointly owned by all exchanges.
How does the transaction process work with the Options Clearing Corporation? - ✔-The seller sells
options to OCC, and the buyer buys from OCC.
What must an option writer do when selling options through the OCC? - ✔-The option writer must post
margin or the underlying security with a brokerage that is a member of the OCC.
Option Positions - ✔-Long call
Long put
Short call
Short put
Long the Contract - ✔-own the right to decide whether or not to exercise the option. You pay the
premium to the other person in the contract to buy that right
Short the Contract - ✔-You're paid to accept the risk that the other person might exercise the option
and you have to trade the asset
In the Money Option - ✔-can be exercised today for positive payoff
Out the Money Option - ✔-An option that would not yield a positive payoff if the stock price remained
unchanged until expiration
What does intrinsic value of an option refer to? - ✔-The payoff the option would receive if exercised
right now.
What is the intrinsic value of an out of the money option? - ✔-Zero intrinsic value.
FIN 6100 Exam 4 With Complete Solutions Latest Update
FIN 6100 Exam 4 With Complete
Solutions Latest Update
Derivative - ✔-A contract between two individuals that has cash flows based on the value of some
asset or event
What are derivative contracts? - ✔-Contracts between two individuals or entities.
In a derivative contract, what happens to cash flow between the parties? - ✔-Whatever cash flow one
party gains, the other has to lose an identical amount.
Types of Derivatives - ✔-Forwards, futures, options, swaps
Swaps - ✔-used to trade expenses with another party
Interest Rate Swaps - ✔-can trade fixed payment stream for a variable payment stream or vice versa
Currency Swaps - ✔-can trade expenses owed in a foreign country for no expense owed by a counter
party in domestic country. No need to convert currencies
Options - ✔-contracts that give the owner the right to buy or sell the underlying asset
-Created by investors and sold to other investors
-options expand investment opportunities, lower costs, increase leverage
What are the two forms of options? - ✔-Call options and put options.
What is a call option? - ✔-A call option gives the owner the right to buy an asset at a pre-agreed upon
price by a set date.
FIN 6100 Exam 4 With Complete Solutions Latest Update
,FIN 6100 Exam 4 With Complete Solutions Latest Update
What is a put option? - ✔-A put option gives the owner the right to sell an asset at a pre-agreed upon
price by a set date.
What is a Call Option? - ✔-The option to buy shares of stock at a specified time in the future.
When do investors purchase call options? - ✔-When they expect the underlying security's price to rise.
Exercise price - ✔-The fixed price at which an option holder can buy or sell the underlying. Also called
strike price, striking price, or strike.
Expiration date - ✔-the last day a product is considered fresh; also called maturity; certain date
Option Premium - ✔-price paid by buyer to seller to obtain the right
Put Option - ✔-investors purchase puts if they expect the underlying security's price to fall
How Options Work - ✔--Call buyer/seller expects the price of the underlying security to increase,
decrease, or stay steady
-Put buyer/seller expects the price of the underlying security to decrease, increase, or stay steady
Possible Courses of action:
1. option may expire worthless
2. option may be exercised
3. option may be sold in the secondary market
Option Trading - ✔--exchanges have standardized exercise dates, exercise prices, and contract
quantities (100 shares)
-non-standardized options can be traded over the counter
What is the role of the Options Clearing Corporation? - ✔-An intermediary between buyers and sellers
of options to ensure fulfillment of obligations.
FIN 6100 Exam 4 With Complete Solutions Latest Update
, FIN 6100 Exam 4 With Complete Solutions Latest Update
Who owns the Options Clearing Corporation? - ✔-It is jointly owned by all exchanges.
How does the transaction process work with the Options Clearing Corporation? - ✔-The seller sells
options to OCC, and the buyer buys from OCC.
What must an option writer do when selling options through the OCC? - ✔-The option writer must post
margin or the underlying security with a brokerage that is a member of the OCC.
Option Positions - ✔-Long call
Long put
Short call
Short put
Long the Contract - ✔-own the right to decide whether or not to exercise the option. You pay the
premium to the other person in the contract to buy that right
Short the Contract - ✔-You're paid to accept the risk that the other person might exercise the option
and you have to trade the asset
In the Money Option - ✔-can be exercised today for positive payoff
Out the Money Option - ✔-An option that would not yield a positive payoff if the stock price remained
unchanged until expiration
What does intrinsic value of an option refer to? - ✔-The payoff the option would receive if exercised
right now.
What is the intrinsic value of an out of the money option? - ✔-Zero intrinsic value.
FIN 6100 Exam 4 With Complete Solutions Latest Update
