BMGT444 Final UPDATED Exam
Questions and CORRECT Answers
Lecture 1 - CORRECT ANSWER - Start
Derivative - CORRECT ANSWER - - an instrument whose value depends on, or is
derived from, the value of another (underlying) asset
Why Derivatives are Important? - CORRECT ANSWER - 1. Derivatives transfer risk
from one party to another
2. Embedded derivatives are part of many financial instruments
3. Real options help assess uncertain investments
Forward Contracts - CORRECT ANSWER - - an agreement to buy or sell some asset to
another party at some point in the future for a fixed amount
Futures Contracts - CORRECT ANSWER - - an agreement to buy or sell an asset for a
certain price at a certain time in the future
Difference Between Forwards and Futures - CORRECT ANSWER - - Futures contract is
traded on an exchange
- Futures require margin requirements and are marked-to-market
- Futures are standardized
- Futures are more liquid and easier to resell
- Forwards are customized and traded OTC so harder to resell
Long vs. Short Options Definition - CORRECT ANSWER - - The long position (holder)
has the right, but not the obligation, to buy (call) or sell (put)
- The short position (writer) has an obligation to fulfill the contract if the long chooses to
exercise
, Types of Traders - CORRECT ANSWER - 1. Hedgers - Goal: Reduce risk from
price/market movements.
2. Speculators - Goal: Profit from anticipated market moves; willing to take on risk.
3. Arbitrageurs - Goal: Exploit price differences for risk-free profit.
Call vs. Put Options Definition - CORRECT ANSWER - - A call option is the right but
not the obligation to buy an asset at a specified exercise price on or before the exercise date
- A put option is the right but not the obligation to sell an asset at a specified exercise price on or
before the exercise date
Options Terms - CORRECT ANSWER - - Exercise Price (Strike Price)
- Expiration (Exercise) Date
- Option Premium
- Time Premium
- Intrinsic Value
Exercise Price (Strike Price) - CORRECT ANSWER - - Exercise Price (Strike Price) = the
price at which the underlying security is bought or sold
Expiration (Exercise) Date - CORRECT ANSWER - - Expiration (or Exercise) Date = the
last date on which the option can be exercised
Option Premium - CORRECT ANSWER - - Option Premium = price paid for an option
Time Premium - CORRECT ANSWER - - Time Premium = value of option above its
intrinsic value, or option premium minus intrinsic value
Intrinsic Value - CORRECT ANSWER - - Intrinsic Value = difference between strike
price and stock price
Questions and CORRECT Answers
Lecture 1 - CORRECT ANSWER - Start
Derivative - CORRECT ANSWER - - an instrument whose value depends on, or is
derived from, the value of another (underlying) asset
Why Derivatives are Important? - CORRECT ANSWER - 1. Derivatives transfer risk
from one party to another
2. Embedded derivatives are part of many financial instruments
3. Real options help assess uncertain investments
Forward Contracts - CORRECT ANSWER - - an agreement to buy or sell some asset to
another party at some point in the future for a fixed amount
Futures Contracts - CORRECT ANSWER - - an agreement to buy or sell an asset for a
certain price at a certain time in the future
Difference Between Forwards and Futures - CORRECT ANSWER - - Futures contract is
traded on an exchange
- Futures require margin requirements and are marked-to-market
- Futures are standardized
- Futures are more liquid and easier to resell
- Forwards are customized and traded OTC so harder to resell
Long vs. Short Options Definition - CORRECT ANSWER - - The long position (holder)
has the right, but not the obligation, to buy (call) or sell (put)
- The short position (writer) has an obligation to fulfill the contract if the long chooses to
exercise
, Types of Traders - CORRECT ANSWER - 1. Hedgers - Goal: Reduce risk from
price/market movements.
2. Speculators - Goal: Profit from anticipated market moves; willing to take on risk.
3. Arbitrageurs - Goal: Exploit price differences for risk-free profit.
Call vs. Put Options Definition - CORRECT ANSWER - - A call option is the right but
not the obligation to buy an asset at a specified exercise price on or before the exercise date
- A put option is the right but not the obligation to sell an asset at a specified exercise price on or
before the exercise date
Options Terms - CORRECT ANSWER - - Exercise Price (Strike Price)
- Expiration (Exercise) Date
- Option Premium
- Time Premium
- Intrinsic Value
Exercise Price (Strike Price) - CORRECT ANSWER - - Exercise Price (Strike Price) = the
price at which the underlying security is bought or sold
Expiration (Exercise) Date - CORRECT ANSWER - - Expiration (or Exercise) Date = the
last date on which the option can be exercised
Option Premium - CORRECT ANSWER - - Option Premium = price paid for an option
Time Premium - CORRECT ANSWER - - Time Premium = value of option above its
intrinsic value, or option premium minus intrinsic value
Intrinsic Value - CORRECT ANSWER - - Intrinsic Value = difference between strike
price and stock price
