Equity derivatives for beginners

Welcome to your Equity derivatives for beginners

What is a stock index?

A benchmark representing the performance of a group of stocks

The price of a specific stock at a particular time

The average price of all stocks traded on an exchange

The dividend yield of a stock

What is an equity derivative?

A financial instrument based on the value of an equity

A type of loan provided by equity holders

A legal contract between shareholders

A method to transfer equity ownership

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

Commodities

Options

Bonds

Stocks

What is the purpose of using equity derivatives for speculation?

To profit from anticipated price movements

To increase dividend yields

To reduce market risk

To diversify investment portfolios

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

They can only be traded on exchanges.

They can only be settled in cash.

They can only be exercised on the expiration date.

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

Which of the following is a characteristic of futures contracts?

They are traded on an exchange

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

What is the primary risk associated with equity derivatives?

Liquidity risk

Market risk

Operational risk

Credit risk

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

Increased counterparty risk

Unlimited loss potential

Limited profit potential

Increased transaction costs

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

Increased liquidity risk

Increased dividend payments

Increased credit risk

Increased market risk

10.

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.

11.

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

OTC options

Stock index futures

Forward contracts

Equity swaps

12.

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

Elimination of counterparty risk

Increased dividend payments

Guaranteed returns

Reduced transaction costs

13.

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

14.

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

Owning equity shares

Selling an equity derivative

Buying an equity derivative

Owning the underlying asset

15.

What is a straddle strategy?

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

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.

16.

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

Covered call

Credit default swap

Currency swap

Interest rate cap

17.

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

Reduced market risk

Elimination of counterparty risk

Increased potential returns

Guaranteed dividend payments

18.

What is a butterfly spread 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.

19.

What is an option writer?

The exchange where options are traded

The buyer of an option contract

The regulatory body overseeing options trading

The seller of an option contract

20.

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 underlying asset can be bought or sold

The price at which the option premium is determined

21.

What is an equity swap?

A contract to exchange equity shares for debt securities

A contract to exchange equity shares between two parties

A contract to exchange equity shares for commodity futures

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

22.

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

Owning the underlying asset

Owning equity shares

Buying an equity derivative

Selling an equity derivative

23.

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

The premium received for selling the option.

Unlimited.

The exercise price of the option.

Zero.

24.

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.

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.

25.

What is the purpose of using equity futures?

To facilitate stock splits

To issue new equity shares

To speculate on the future price movement of an equity

To hedge against price movements of an equity

26.

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 equal to the premium paid for the option.

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.

27.

What is an option premium?

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

The price paid for the option contract.

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

The price at which the option can be exercised.

28.

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

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

They can only be settled in cash.

They can only be exercised on the expiration date.

They can only be traded on exchanges.

29.

What is the primary purpose of using equity derivatives?

To facilitate mergers and acquisitions

To raise capital for a company

To transfer ownership of equity shares

To hedge against price movements

30.

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

Swap

Futures contract

Option

Forward contract

31.

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

The time to expiration

The interest rate

All of the above

The volatility of the underlying asset

32.

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

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

They have a maturity date of less than one year.

They pay a fixed interest rate to bondholders.

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

33.

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.

34.

What is theta in options trading?

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 implied volatility.

The measure of market volatility.

35.

What is delta in options trading?

The measure of time decay in options.

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

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

The measure of market volatility.

36.

What is a covered call strategy?

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

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

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

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

37.

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.

38.

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 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.

39.

What is gamma in options trading?

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

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

The measure of time decay in options.

The measure of market volatility.

40.

What is rho in options trading?

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

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

The measure of time decay in options.

The measure of market volatility.

41.

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

Single stock futures

Interest rate swaps

Stock options

Convertible bonds

42.

What is a protective put strategy?

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

Buying a stock and selling a put 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

43.

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.

44.

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

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.

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

45.

What is a stock index future?

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

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

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

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

46.

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.

Zero.

Unlimited.

47.

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

48.

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

Put option

Forward contract

Call option

Futures contract

49.

What is a hedge?

A method to avoid dividend payments

A financial transaction that reduces the risk of an existing position

A method to increase credit risk

A speculative investment strategy

50.

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

1 out of 5

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Equity derivatives for beginners

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