Equity derivatives for beginners

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

All of the above

The volatility of the underlying asset

The interest rate

The time to expiration

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

Currency swap

Interest rate cap

Credit default swap

Covered call

Which of the following is a characteristic of futures contracts?

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

They have no expiration date

They can only be settled in cash

They are traded on an exchange

What is a covered call strategy?

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

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

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

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.

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

Increased credit risk

Increased market risk

Increased dividend payments

Increased liquidity risk

What is theta in options trading?

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

The measure of market volatility.

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

The measure of time decay in options.

What is an equity derivative?

A type of loan provided by equity holders

A method to transfer equity ownership

A financial instrument based on the value of an equity

A legal contract between shareholders

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

The strike price of the option

The premium paid for the option

Zero

Unlimited

10.

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

They can only be traded on exchanges.

They can only be exercised on the expiration date.

They can only be settled in cash.

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

11.

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

Unlimited loss potential

Increased counterparty risk

Increased transaction costs

Limited profit potential

12.

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

Reduced market risk

Elimination of counterparty risk

Guaranteed dividend payments

Increased potential returns

13.

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

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

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

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

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

14.

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

Futures contract

Put option

Call option

Forward contract

15.

What is rho in options trading?

The measure of market volatility.

The measure of time decay in options.

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.

16.

What is gamma in options trading?

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

The measure of market volatility.

The measure of time decay in options.

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

17.

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 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.

18.

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

Zero.

Unlimited.

The premium received for selling the option.

The exercise price of the option.

19.

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

The writer has a hedge against price movements.

The option premium is fully paid for.

The writer owns the underlying asset.

The option premium is partially paid for.

20.

Which of the following statements is true about option exercise?

Option exercise is determined solely by the regulatory authorities.

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.

21.

What is a stock index?

The price of a specific stock at a particular time

A benchmark representing the performance of a group of stocks

The average price of all stocks traded on an exchange

The dividend yield of a stock

22.

What is a strangle strategy?

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 buying 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.

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

23.

What is vega in options trading?

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

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.

24.

What is the primary purpose of using equity derivatives?

To hedge against price movements

To facilitate mergers and acquisitions

To transfer ownership of equity shares

To raise capital for a company

25.

What is the primary risk associated with equity derivatives?

Credit risk

Operational risk

Liquidity risk

Market risk

26.

What is the main difference between options and futures contracts?

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

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

Options have no expiration date, while futures contracts do.

27.

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 only be settled in cash.

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

28.

What is a protective put strategy?

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

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

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

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

29.

What is an option premium?

The price at which the option can be exercised.

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

The price paid for the option contract.

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

30.

What is the purpose of using equity futures?

To hedge against price movements of an equity

To issue new equity shares

To facilitate stock splits

To speculate on the future price movement of an equity

31.

What is a stock index future?

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

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

32.

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

Stock options

Interest rate swaps

Single stock futures

Convertible bonds

33.

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

Forward contract

Put option

Futures contract

Call option

34.

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

Stock index futures

OTC options

Equity swaps

Forward contracts

35.

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

Commodities

Stocks

Bonds

Options

36.

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.

Buying a stock and selling a call 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.

37.

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

Buying an equity derivative

Owning equity shares

Owning the underlying asset

Selling an equity derivative

38.

What is an equity swap?

A contract to exchange equity shares between two parties

A contract to exchange equity shares for debt securities

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

A contract to exchange equity shares for commodity futures

39.

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

Option

Futures contract

Swap

Forward contract

40.

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

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

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.

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

41.

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

Reduced transaction costs

Guaranteed returns

Increased dividend payments

Elimination of counterparty risk

42.

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.

43.

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

The exercise price of the option.

The premium received for selling the option.

Zero.

Unlimited.

44.

What is the purpose of using equity derivatives for speculation?

To reduce market risk

To increase dividend yields

To profit from anticipated price movements

To diversify investment portfolios

45.

What is a hedge?

A financial transaction that reduces the risk of an existing position

A method to increase credit risk

A speculative investment strategy

A method to avoid dividend payments

46.

What is an option writer?

The exchange where options are traded

The buyer of an option contract

The seller of an option contract

The regulatory body overseeing options trading

47.

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

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

48.

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

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

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

49.

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

Selling an equity derivative

Buying an equity derivative

Owning equity shares

Owning the underlying asset

50.

What is a butterfly spread strategy?

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.

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.

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Equity derivatives for beginners

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