Finance Exam 4

Front 1

option

Back 1

a contract that gives its owner the right to buy or sell some asset at a fixed price on or before a given date

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spot

Back 2

the current price of the underlying

Front 3

strike

Back 3

the over or under bet, the fixed price in the option contract at which the holder can buy or sell the underlying asset

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call

Back 4

the right to buy an asset at a fixed price during a particular period

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put

Back 5

the right to sell an asset at a fixed price during a particular period of time, opposite of a call

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premium

Back 6

option ______________ is made up of intrinsic value and time value

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intrinsic value

Back 7

the value of an option if it were about to expire

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time value

Back 8

the contract may become more valuable before it expires

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in the money

Back 9

positive intrinsic value

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out of the money

Back 10

no intrinsic value

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at the money

Back 11

spot price = strike price

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options chain

Back 12

a listing of all the put and call option strike prices along with their premiums for a given maturity period

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exercise the option

Back 13

the act of buying or selling the underlying asset via the option contract

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volatile

Back 14

A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration

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long

Back 15

A strategy of trading options whereby the trader will purchase a long call and a long put with the same underlying asset, expiration date and strike price; The strategy is a bet on increased volatility in the future as profits from this strategy are maximized if the underlying security moves up or down from present levels

Front 16

short

Back 16

An options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options; risky strategy an investor uses when he or she believes that a stock's price will not move up or down significantly

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writer

Back 17

the seller of the option

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holder

Back 18

the buyer of the option

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bid

Back 19

The price a buyer is willing to pay for a security

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ask

Back 20

the price a seller is willing to sell a security

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expiration

Back 21

3rd friday of the expiration month, the last day on which an option may be exercised

Front 22

LEAP

Back 22

Publicly traded options contracts with expiration dates that are longer than one year

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right to buy

Back 23

a call option is the ____________ an asset at a fixed price during a stated period of time

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right to sell

Back 24

a put option is the ____________ an asset at a fixed price during a stated period of time

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collar

Back 25

A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option

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covered call

Back 26

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset

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straddle

Back 27

An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

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strangle

Back 28

An options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset.

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married put

Back 29

aka protective put; An option strategy whereby an investor, holding a long position in stock, purchases a put on the same stock to protect against a depreciation in the stock's price.

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bull put credit spread

Back 30

A type of options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. This strategy is constructed by purchasing one put option while simultaneously selling another put option with a higher strike price. The goal of this strategy is realized when the price of the underlying stays above the higher strike price, which causes the short option to expire worthless, resulting in the trader keeping the premium

Front 31

bear call credit spread

Back 31

A type of options strategy used when a decline in the price of the underlying asset is expected. It is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option

Front 32

iron condor

Back 32

aka credit spread; An advanced options strategy that involves buying and holding four different options with different strike prices. The iron condor is constructed by holding a long and short position in two different strangle strategies.

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futures

Back 33

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.

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forward

Back 34

A customized contract between two parties to buy or sell an asset at a specified price on a future date

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cash settlement

Back 35

A settlement method used in certain future and option contracts whereby, upon expiry or exercise, the seller of the financial instrument does not deliver the actual but transfers the associated cash position.

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CME

Back 36

The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and a small amount on agricultural products.

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CBOT

Back 37

A commodity exchange established in 1848 that today trades in both agricultural and financial contracts. The CBOT originally traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts on a wide range of products including gold, silver, U.S. Treasury bonds and energy.

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exchange rate

Back 38

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another

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currency forward

Back 39

an agreement to exchange currencies at some point in the future using an agreed upon exchange rate

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direct quote

Back 40

A foreign exchange rate quoted as the domestic currency per unit of the foreign currency. In other words, it involves quoting in fixed units of foreign currency against variable amounts of the domestic currency.

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indirect quote

Back 41

A currency quotation in the foreign exchange markets that expresses the amount of foreign currency required to buy or sell one unit of the domestic currency

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triangle arbitrage

Back 42

making money by changing currency among three exchange rates

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interest rate parity

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A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate

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home currency method

Back 44

change money to home currency and then make present value

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foreign currency method

Back 45

make present value and then convert to home country's currency

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cross rate

Back 46

the implicit exchange rate between two currencies when both are quoted in some third currency

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underlying

Back 47

what you are betting on