Question 1

To settle a stock index option, the exchange-assigned option writer:

Accepted Answer

A)  Delivers all the stocks that make up the index. 
B)  Pays cash to the option buyer. 
C)  Takes an offsetting position. 
D)  Lets the option expire worthless. 
E)  None of the above. 
A)  Delivers all the stocks that make up the index. 
B)  Pays cash to the option buyer. 
C)  Takes an offsetting position. 
D)  Lets the option expire worthless. 
E)  None of the above. B

Question 2

A strategy that seeks to enhance returns as a result of the mispricing of the futures contract relative to the cash index is known as:

Accepted Answer

A)  Program trading. 
B)  Index arbitrage. 
C)  Dynamic hedging. 
D)  Riskless investing. 
E)  None of the above. 
A)  Program trading. 
B)  Index arbitrage. 
C)  Dynamic hedging. 
D)  Riskless investing. 
E)  None of the above. B

Question 3

Explain the investment features of stock index options and futures.

Accepted Answer

a. Trading places.
b. Open interest.
c. Cash settlement.
d. Margin requirements.
e. Value of stock index options and futures.

Question 4

An investment strategy that seeks to insure the value of a portfolio using a synthetic put option strategy is called:

Accepted Answer

A)  Riskless investing. 
B)  Dynamic hedging. 
C)  Program trading. 
D)  Riskless arbitrage. 
E)  None of the above. 
A)  Riskless investing. 
B)  Dynamic hedging. 
C)  Program trading. 
D)  Riskless arbitrage. 
E)  None of the above.

Question 5

Stock index options are regulated by:

Accepted Answer

A)  The Commodity Futures Trading Commission. 
B)  The Securities and Exchange Commission. 
C)  Stock index options are self-regulated. 
D)  The clearinghouse. 
E)  None of the above. 
A)  The Commodity Futures Trading Commission. 
B)  The Securities and Exchange Commission. 
C)  Stock index options are self-regulated. 
D)  The clearinghouse. 
E)  None of the above.

Question 6

Which of the following statements is most correct?

Accepted Answer

A)  The stock index options market was initially inefficient. 
B)  Arbitrage in the stock index options market is difficult. 
C)  Since 1983, stock index futures are fairly priced. 
D)  All of the above. 
E)  None of the above. 
A)  The stock index options market was initially inefficient. 
B)  Arbitrage in the stock index options market is difficult. 
C)  Since 1983, stock index futures are fairly priced. 
D)  All of the above. 
E)  None of the above.

Question 7

The decision on how to divide funds across the major asset classes is referred to as:

Accepted Answer

A)  Dynamic hedging. 
B)  Insuring the portfolio. 
C)  Asset allocation decision. 
D)  Program trading. 
E)  None of the above. 
A)  Dynamic hedging. 
B)  Insuring the portfolio. 
C)  Asset allocation decision. 
D)  Program trading. 
E)  None of the above.

Question 8

Institutional investors employ index-related strategies in order to:

Accepted Answer

A)  Control market risk exposure. 
B)  Construct an index fund. 
C)  Enhance returns through index arbitrage. 
D)  Implement an asset allocation decision. 
E)  All of the above. 
A)  Control market risk exposure. 
B)  Construct an index fund. 
C)  Enhance returns through index arbitrage. 
D)  Implement an asset allocation decision. 
E)  All of the above.

Question 9

Equity swaps can be used to create an indexed portfolio to match some U.S. or non U.S. stock index.

Accepted Answer

A) True 
 B)False

Question 10

With stock index options, the hedger:

Accepted Answer

A)  Has downside risk protection. 
B)  Locks in a price. 
C)  Retains the upside potential, which is reduced by the option. 
D)  a and c only. 
E)  All of the above. 
A)  Has downside risk protection. 
B)  Locks in a price. 
C)  Retains the upside potential, which is reduced by the option. 
D)  a and c only. 
E)  All of the above.

Question 11

The exercise provision of the S&P 100 index option is that:

Accepted Answer

A)  It cannot be exercised until expiration. 
B)  It can be exercised any time up to and including the expiration date. 
C)  It cannot be exercised early. 
D)  a and c only. 
E)  None of the above. 
A)  It cannot be exercised until expiration. 
B)  It can be exercised any time up to and including the expiration date. 
C)  It cannot be exercised early. 
D)  a and c only. 
E)  None of the above.

Question 12

A contract's open interest is used to measure:

Accepted Answer

A)  The level of trading volume. 
B)  The liquidity of a contract. 
C)  The number of contracts that have been entered into but not yet liquidated. 
D)  b and c only. 
E)  All of the above. 
A)  The level of trading volume. 
B)  The liquidity of a contract. 
C)  The number of contracts that have been entered into but not yet liquidated. 
D)  b and c only. 
E)  All of the above.

Question 13

Which of the following statements is most correct?

Accepted Answer

A)  The development of the FLEX option is a response to the growing OTC market. 
B)  There is an active secondary market for FLEX options. 
C)  The FLEX option represents a link between listed options and OTC products. 
D)  FLEX options can be created for Treasury securities. 
E)  All of the above. 
A)  The development of the FLEX option is a response to the growing OTC market. 
B)  There is an active secondary market for FLEX options. 
C)  The FLEX option represents a link between listed options and OTC products. 
D)  FLEX options can be created for Treasury securities. 
E)  All of the above.

Question 14

When counterparties agree to exchange the return on some stock index for an interest rate, the arrangement is called:

Accepted Answer

A)  Equity swap. 
B)  Interest rate swap. 
C)  Currency swap. 
D)  Credit swap. 
E)  None of the above. 
A)  Equity swap. 
B)  Interest rate swap. 
C)  Currency swap. 
D)  Credit swap. 
E)  None of the above.

Question 15

The value of a stock index option is equal to:

Accepted Answer

A)  The index value multiplied by $100. 
B)  The index value multiplied by the number of shares purchased. 
C)  The index value multiplied by the contract multiple. 
D)  The share price divided by the index value. 
E)  None of the above. 
A)  The index value multiplied by $100. 
B)  The index value multiplied by the number of shares purchased. 
C)  The index value multiplied by the contract multiple. 
D)  The share price divided by the index value. 
E)  None of the above.

Question 16

A FLEX option is a contract whereby the terms of the contract can be customized with respect to:

Accepted Answer

A)  Strike price. 
B)  Expiration date. 
C)  Settlement style. 
D)  Underlying instrument. 
E)  All of the above. 
A)  Strike price. 
B)  Expiration date. 
C)  Settlement style. 
D)  Underlying instrument. 
E)  All of the above.

Question 17

Which of the following statements is false?

Accepted Answer

A)  Index-related trading has increase stock price volatility. 
B)  The stock index options market has become the price discovery market. 
C)  Evidence suggests that index-related trading was responsible for Black Monday. 
D)  b and c only. 
E)  None of the above. 
A)  Index-related trading has increase stock price volatility. 
B)  The stock index options market has become the price discovery market. 
C)  Evidence suggests that index-related trading was responsible for Black Monday. 
D)  b and c only. 
E)  None of the above.

Question 18

Options written on a stock index include:

Accepted Answer

A)  Stock index options. 
B)  Stock index futures. 
C)  Equity swaps. 
D)  Equity options. 
E)  None of the above. 
A)  Stock index options. 
B)  Stock index futures. 
C)  Equity swaps. 
D)  Equity options. 
E)  None of the above.

Question 19

Stock index options can be used to:

Accepted Answer

A)  Protect a portfolio position against an adverse price movement. 
B)  Bet on the movement of stock prices. 
C)  Earn an abnormal return. 
D)  a and b only. 
E)  All of the above. 
A)  Protect a portfolio position against an adverse price movement. 
B)  Bet on the movement of stock prices. 
C)  Earn an abnormal return. 
D)  a and b only. 
E)  All of the above.

Question 20

What is the role of stock index options and futures in financial markets?

Accepted Answer

a. Liquidity.
b. Pri

Exam 16: The Market for Stock Index Products and Other Equity Derivatives

To settle a stock index option, the exchange-assigned option writer:

A strategy that seeks to enhance returns as a result of the mispricing of the futures contract relative to the cash index is known as:

Explain the investment features of stock index options and futures.

An investment strategy that seeks to insure the value of a portfolio using a synthetic put option strategy is called:

Stock index options are regulated by:

Which of the following statements is most correct?

The decision on how to divide funds across the major asset classes is referred to as:

Institutional investors employ index-related strategies in order to:

Equity swaps can be used to create an indexed portfolio to match some U.S. or non U.S. stock index.

With stock index options, the hedger:

The exercise provision of the S&P 100 index option is that:

A contract's open interest is used to measure:

Which of the following statements is most correct?

When counterparties agree to exchange the return on some stock index for an interest rate, the arrangement is called:

The value of a stock index option is equal to:

A FLEX option is a contract whereby the terms of the contract can be customized with respect to:

Which of the following statements is false?

Options written on a stock index include:

Stock index options can be used to:

What is the role of stock index options and futures in financial markets?

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: I

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Introduction to the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

The Theory and Structure of Interest Rates

Valuation of Debt Contracts and Their Price Volatility Characteristics

The Term Structure of Interest Rates

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

Filters