Equity derivatives for beginners

Welcome to your Equity derivatives for beginners

What is the primary purpose of using equity derivatives?

To transfer ownership of equity shares

To hedge against price movements

To facilitate mergers and acquisitions

To raise capital for a company

Which of the following factors affects the value of an option premium?

All of the above

The volatility of the underlying asset

The time to expiration

The interest rate

Which of the following is a characteristic of futures contracts?

They are traded on an exchange

They can only be settled in cash

They provide the right, but not the obligation, to buy or sell the underlying asset

They have no expiration date

What is a strangle strategy?

Selling a stock and selling a call option on the same stock with different exercise prices and the same expiration date.

Buying a stock and buying a put option on the same stock with different exercise prices and the same expiration date.

Buying a call option and selling a put option on the same stock with different exercise prices and the same expiration date.

Buying a stock and selling a call option on the same stock with different exercise prices and the same expiration date.

What is delta in options trading?

The rate of change of an option's premium with respect to the underlying asset price.

The measure of time decay in options.

The measure of market volatility.

The probability of an option expiring in-the-money.

What is a protective put strategy?

Buying a stock and selling a put option on the same stock

Selling a stock and selling a put option on the same stock

Buying a stock and buying a call option on the same stock

Buying a put option and selling a call option on the same stock

Which of the following statements is true about European-style options?

They can only be exercised on the expiration date.

They can only be traded on exchanges.

They can be exercised at any time before the expiration date.

They can only be settled in cash.

What is the purpose of using equity derivatives for speculation?

To reduce market risk

To profit from anticipated price movements

To increase dividend yields

To diversify investment portfolios

What is meant by the term "covered" in covered call writing?

The option premium is partially paid for.

The option premium is fully paid for.

The writer has a hedge against price movements.

The writer owns the underlying asset.

10.

Which of the following is true about at-the-money options?

The exercise price is greater than the market price of the underlying asset.

The exercise price is equal to the premium paid for the option.

The exercise price is less than the market price of the underlying asset.

The exercise price is equal to the market price of the underlying asset.

11.

What is a straddle strategy?

Buying a stock and buying a put option on the same stock with the same exercise price and expiration date.

Buying a call option and selling a put option on the same stock with the same exercise price and expiration date.

Selling a stock and selling a call option on the same stock with the same exercise price and expiration date.

Buying a stock and selling a call option on the same stock with the same exercise price and expiration date.

12.

Which of the following is true about in-the-money options?

The exercise price is less than the market price of the underlying asset.

The exercise price is equal to the premium paid for the option.

The exercise price is greater than the market price of the underlying asset.

The exercise price is equal to the market price of the underlying asset.

13.

Which type of equity derivative provides the buyer with the right, but not the obligation, to sell an underlying asset at a predetermined price?

Call option

Forward contract

Put option

Futures contract

14.

What is the maximum loss for the writer of a put option?

The premium received for selling the option.

The exercise price of the option.

Unlimited.

Zero.

15.

What is the maximum loss for a buyer of an equity put option?

The strike price of the option

Zero

The premium paid for the option

Unlimited

16.

Which of the following is a disadvantage of using equity derivatives?

Increased market risk

Increased credit risk

Increased liquidity risk

Increased dividend payments

17.

Which of the following statements is true about option exercise?

Both option buyers and option writers can choose to exercise their options.

Option buyers can choose to exercise their options, while option writers must fulfill their obligations if exercised.

Option writers can choose to exercise their options, while option buyers must fulfill their obligations if exercised.

Option exercise is determined solely by the regulatory authorities.

18.

Which of the following is a disadvantage of covered call writing?

Limited profit potential

Unlimited loss potential

Increased counterparty risk

Increased transaction costs

19.

What is rho in options trading?

The rate of change of delta with respect to the underlying asset price.

The rate of change of an option's premium with respect to changes in interest rates.

The measure of market volatility.

The measure of time decay in options.

20.

What is the maximum loss for the writer of a call option?

The premium received for selling the option.

Zero.

The exercise price of the option.

Unlimited.

21.

What is a covered call strategy?

Buying a stock and selling a call option on the same stock

Buying a stock and buying a put option on the same stock

Selling a stock and selling a call option on the same stock

Buying a call option and selling a put option on the same stock

22.

Which of the following is an example of an equity option strategy?

Interest rate cap

Currency swap

Covered call

Credit default swap

23.

What is the primary difference between equity options and equity swaps?

Options can only be settled in cash, while swaps involve physical delivery.

Options have no expiration date, while swaps have predefined termination dates.

Options are traded on exchanges, while swaps are only traded over-the-counter.

Options provide the right, but not the obligation, to buy or sell the underlying asset, while swaps involve the exchange of returns.

24.

What is vega in options trading?

The rate of change of delta with respect to the underlying asset price.

The measure of time decay in options.

The rate of change of an option's premium with respect to changes in implied volatility.

The measure of market volatility.

25.

What is the primary risk associated with equity derivatives?

Credit risk

Market risk

Operational risk

Liquidity risk

26.

Which of the following is an example of an equity index derivative?

Convertible bonds

Single stock futures

Interest rate swaps

Stock options

27.

Which of the following is a benefit of using equity derivatives for hedging?

Increased dividend payments

Elimination of counterparty risk

Guaranteed returns

Reduced transaction costs

28.

What is the primary advantage of using equity derivatives for leverage?

Increased potential returns

Reduced market risk

Guaranteed dividend payments

Elimination of counterparty risk

29.

Which of the following is an example of an exchange-traded equity derivative?

OTC options

Stock index futures

Equity swaps

Forward contracts

30.

What is gamma in options trading?

The measure of time decay in options.

The measure of market volatility.

The rate of change of delta with respect to the underlying asset price.

The probability of an option expiring in-the-money.

31.

What is meant by the term "long position" in equity derivatives?

Buying an equity derivative

Owning the underlying asset

Selling an equity derivative

Owning equity shares

32.

What is the purpose of using equity futures?

To facilitate stock splits

To hedge against price movements of an equity

To issue new equity shares

To speculate on the future price movement of an equity

33.

What is an option premium?

The price at which the option can be bought or sold.

The price at which the underlying asset can be bought or sold.

The price at which the option can be exercised.

The price paid for the option contract.

34.

Which of the following is an example of a non-linear equity derivative?

Option

Futures contract

Swap

Forward contract

35.

What is a butterfly spread strategy?

Buying a stock and buying a put option on the same stock with different exercise prices and the same expiration date.

Selling a stock and selling a call option on the same stock with different exercise prices and the same expiration date.

Buying a stock and selling a call option on the same stock with different exercise prices and the same expiration date.

Buying a call option and selling a put option on the same stock with different exercise prices and the same expiration date.

36.

What is an equity swap?

A contract to exchange the returns of equity shares for fixed or floating payments

A contract to exchange equity shares for commodity futures

A contract to exchange equity shares between two parties

A contract to exchange equity shares for debt securities

37.

What is meant by the term "short position" in equity derivatives?

Owning equity shares

Buying an equity derivative

Owning the underlying asset

Selling an equity derivative

38.

What is meant by the term "exercise price" in equity options?

The price at which the underlying asset can be bought or sold

The price at which the option can be exercised

The price at which the option can be bought or sold

The price at which the option premium is determined

39.

Which type of equity derivative provides the buyer with the right, but not the obligation, to buy an underlying asset at a predetermined price?

Forward contract

Futures contract

Call option

Put option

40.

What is the main difference between options and futures contracts?

Options can only be settled in cash, while futures contracts can be settled with physical delivery.

Options provide the right, but not the obligation, to buy or sell the underlying asset, while futures contracts require the buyer and seller to fulfill their contractual obligations.

Options can be traded on exchanges, while futures contracts are only traded over-the-counter.

Options have no expiration date, while futures contracts do.

41.

Which of the following is true about out-of-the-money options?

The exercise price is greater than the market price of the underlying asset.

The exercise price is less than the market price of the underlying asset.

The exercise price is equal to the premium paid for the option.

The exercise price is equal to the market price of the underlying asset.

42.

What is a stock index?

The average price of all stocks traded on an exchange

The price of a specific stock at a particular time

A benchmark representing the performance of a group of stocks

The dividend yield of a stock

43.

What is an equity derivative?

A legal contract between shareholders

A method to transfer equity ownership

A type of loan provided by equity holders

A financial instrument based on the value of an equity

44.

What is an option writer?

The seller of an option contract

The regulatory body overseeing options trading

The exchange where options are traded

The buyer of an option contract

45.

Which of the following statements is true about American-style options?

They can only be exercised on the expiration date.

They can only be traded on exchanges.

They can be exercised at any time before the expiration date.

They can only be settled in cash.

46.

What is theta in options trading?

The rate of change of an option's premium with respect to changes in implied volatility.

The measure of market volatility.

The rate of change of delta with respect to the underlying asset price.

The measure of time decay in options.

47.

Which of the following is a key feature of convertible bonds?

They have a maturity date of less than one year.

They can be converted into a predetermined number of equity shares.

They pay a fixed interest rate to bondholders.

They provide the holder with the right to buy or sell an underlying asset.

48.

What is a hedge?

A method to avoid dividend payments

A method to increase credit risk

A speculative investment strategy

A financial transaction that reduces the risk of an existing position

49.

Which of the following is an example of an equity derivative?

Stocks

Commodities

Bonds

Options

50.

What is a stock index future?

A contract to buy or sell a portfolio of stocks that replicate the composition of a stock index

A contract to convert the returns of a stock index into a different currency

A contract to buy or sell a specific stock at a predetermined price in the future

A contract to exchange the returns of a stock index for fixed or floating payments

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Equity derivatives for beginners

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