FIN 6100 Exam Questions and Answers Already Passed Latest Update

FIN 6100 Exam Questions and Answers Already Passed Latest Update Derivative - Answers A contract between two individuals that has cash flows based on the value of some asset or event Derivative Contracts - Answers between two individuals or entities Types of Derivatives - Answers Forwards, futures, options, swaps Swaps - Answers used to trade expensses with another party Interest Rate Swaps - Answers can trade fixed payment stream for a variable payment stream or vice versa Currency Swaps - Answers 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 - Answers 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 Options come in two forms - Answers -Call options give owner of the options the night to buy an asset @ a pre-agreed upon price by a set date -Put options give the owner of options the right to sell an asset at a pre-agreed upon price by set date (no one is obligated to trade) Call Option - Answers the option to buy shares of stock at a specified time in the future -investors purchase calls if they expect the underlying security's price to rise Exercise price - Answers The fixed price at which an option holder can buy or sell the underlying. Also called strike price, striking price, or strike. Expiration date - Answers the last day a product is considered fresh Option Premium - Answers price paid by buyer to seller to obtain the right Put Option - Answers investors purchase puts if they expect the underlying security's price to fall How Options Work - Answers -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 - Answers -exchanges have standardized exercise dates, exercise prices, and contract quantities (100 shares) -non-standardized options can be traded over the counter Options Clearing Corporation - Answers -An intermediary between buyers and sellers of options to ensure fulfillment of obligations 1. jointly owned by all exchanges 2. seller sells options to OCC, buyer buys from OCC 3. Option writer (seller) must post margin or the underlying security with a brokerage that is a member of the OCC Option Positions - Answers Long call Long put Short call Short put Long the Contract - Answers 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 - Answers 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 - Answers can be exercised today for positive payoff Out the Money Option - Answers An option that would not yield a positive payoff if the stock price remained unchanged until expiration Option Premium Parts - Answers 1. Intrinsic value of the option refers to the payoff the option would receive if exercised right now -out of the money would have zero intrinsic value -in the money would have positive intrinsic value 2. The time value of the option refers to the extra value created by having remaining time until option expires European Options - Answers can only be exercised on the expiration date American Options - Answers can be exercised at any time up to the expiration date What affects value of an option? - Answers -Exercise/Strike price (X) -Price of underlying assets (S)