S6 Derivatives Post assessment

Derivatives are highly leveraged, which implies that _____

• You can take a position with smaller investments (margin) using derivatives

• You can take a lower position with higher investments using derivatives

• You can take a higher position if you buy the underlying assets instead of buying derivatives

• You should buy the underlying assets as you might make more profit on them rather than derivatives

What is a key difference between OTC and listed derivatives?

• OTC have no counterparty risk; listed do

• OTC are customized and negotiated; listed are standardized and exchange-traded

• OTC require margin payments; listed do not

• OTC are exchange-traded; listed are OTC

What is a Forward Rate Agreement (FRA)?

• An option to buy stocks

• A futures contract on commodities

• An OTC contract to lock in an interest rate for a future date

• A swap agreement between two parties

What does closing out a futures contract mean?

• Paying the initial margin

• Letting the contract expire without action

• Entering an opposite contract to offset the original position before expiry

• Exercising the option to buy the underlying asset

A put option buyer will exercise the put if _____

• Strike > spot

• Strike < spot

• Strike = spot

• Spot > strike

An investor buys a call option on a stock selling for $90, with a strike price of $75 for a premium of $16.

• The option is in the money

• The option is at the money

• The option is out of the money

• None of the above

What distinguishes an option contract from other derivatives?

• It always requires delivery of the underlying asset

• The buyer has a right but no obligation to buy or sell

• It has no premium

• It is always traded OTC

A trader holds a European put option on DEF Corp stock, which expires today. If the option is out-of-the-money at expiration, what will happen?

• The option will be automatically exercised

• The option will expire worthless

• The option will be sold to another trader

• The option will be converted into a call option

How does an interest rate swap help corporations?

• By increasing floating rate exposure

• By exchanging floating-rate payments for fixed-rate payments to manage debt liabilities

• By eliminating all interest payments

• By buying stocks

Emily enters into a derivatives contract and is required to maintain a certain level of margin in her account. What happens if the value of Emily's account falls below the maintenance margin level?

• The contract is automatically settled

• Emily receives a margin call to deposit additional funds

• Emily's position is automatically liquidated

• The margin requirement is lowered