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

Question 1

Options written on a stock index include:

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

Answer 1

Stock index options.

Question 2

Stock index options are regulated by:

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.

Answer 2

The Securities and Exchange Commission.

Question 3

A contract's open interest is used to measure:

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.

Answer 3

b and c only.

Question 4

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

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.

Question 5

The value of a stock index option is equal to:

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 6

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

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 7

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

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

Question 8

Which of the following statements is most correct?

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 9

Options markets have developed in many countries, including:

A) The United Kingdom.
B) Canada.
C) The Netherlands.
D) All of the above.
E) a and b only.

Question 10

Which of the following statements is false?

A) Stock index futures contracts are cash settlement contracts.
B) There are margin requirements for futures contracts.
C) Futures positions are marked-to-market daily.
D) Margins for speculators are less than for hedgers.
E) None of the above.

Question 11

Stock index options can be used to:

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 12

Institutional investors employ index-related strategies in order to:

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 13

Which of the following statements is most correct?

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 14

With stock index options, the hedger:

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 15

Buying stock index futures, will:

A) Increase a portfolio's beta.
B) Decrease a portfolio's beta.
C) Not affect a portfolio's beta.
D) None of the above.

Question 16

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

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

Question 17

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

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

Question 18

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:

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

Question 19

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

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

Question 20

Which of the following statements is false?

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 21

There are options on stock index futures.

Question 22

Selling stock index futures will increase a portfolio's beta.

Question 23

A synthetic put option is created using stock index futures.

Question 24

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

Question 25

Explain the investment features of stock index options and futures.

Question 26

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

Question 27

Explain what an equity swap is and how it can be used.