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25 Cards in this Set
- Front
- Back
What is an option?
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a contract in which the writer of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at a specified price within a specified period of time
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What is an option price or an option premium?
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price of an option; the cost of the right to the buyer
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What is the exercise price or strike price?
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the price at which the underlying may be bought or sold
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What is the expiration date or maturity date?
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date after which an option is void
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What is a call option or more simply a call?
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when an option grants the buyer the right to purchase the underlying from the writer
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What is a put option or more simply a put?
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when the option buyer has the right to sell the underlying to the writer
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What are American options?
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options that may be exercised at any time up to and including the expiration date
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What are European options?
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options that must be exercised only at the expiration date
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Where can options be traded?
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1. on an organized exchange
2. over-the-counter market |
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What are the advantages of exchange-trade options over OTC options?
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1. standardization of the exercise price, quantity of the underlying, expiration date of the contract
2. clearinghouse severs link between buyer and seller; no risk 3. transaction costs are lower |
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What are the differences between options and futures contracts?
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1. in an option, one party is not obligated to transact at a later date; futures buyer does not pay seller to accept the obligations
2. options do not provide a symmetric risk/reward relationship; in futures contract, buyer realizes a dollar-for-dollar gain when the price of the futures contract increases |
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What is being long a call option?
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buying a call option
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What is being short a call option?
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selling a call option
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What is being long a put option?
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buying a put option
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What is being short a put option?
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selling a put option
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How does the time value of money complicate risk/rewards of options?
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by paying an option price, the buyer foregoes earning interest on that income; also by not owning the underlying, the buyer of an option foregoes any interim cash flows (dividends) that he can reinvest
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What are the benefits of hedging with futures contracts?
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1. lock in a price, eliminates price risk; however, investor loses benefits from a favorable price move;
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What are the different US Options Markets?
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1. stock options- options on individual shares; stock index options- underlying is a stock index
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What is the Options Clearing Corporation (OCC)?
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established by the Chicago Board Options Exchange (CBOE) and American Stock Exchange; has issued, guaranteed, registered, cleared and settled all transactions involving listed options on all exchanges
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What are Long-Term Equity Anticipation Securities?
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for an individual stock and stock index, only the next 2 expiration months are traded on the exchange; consequently the longest time before expiration of a standard option is 6 months; LEAPS are option contracts designed to offer option contracts with longer maturities;
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What are options as physicals?
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an interest rate option whose underlying is a fixed-income instrument
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What is a FLEX option?
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an option contract with some terms that have been customized; customization is a result of wide range of portfolio strategy needs
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What are the names of options that can be created in which the option can be exercised at several specified dates as well as the expiration date of the option?
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1. limited exercise options
2. Bermuda options 3. Atlantic options |
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What are two types of exotic options?
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1. alternative options (either-or option)- has a payoff which the best indepedent payoff of two distinct assets
2. outperformance options- payoff is based on the relative payoff of two assets at the expiration date |
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What is a futures option?
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option on a futures contract, gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option; benefits- unlike options on fixed-income securities, futures options on T-coupons do not require payments of accrued interest to be made, no delivery squeeze over asset because of large supply of futures contract (no price bid up); finding out the prices of bonds can be difficult whereas futures prices are readily available
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