Question 1

In regards to FLEX options, which of the below statements is TRUE?

Accepted Answer

A FLEX option is an option contract that allows investors to customize certain terms, such as expiration date, strike price, and exercise style. It is traded on an options exchange and cleared and guaranteed by the associated clearinghouse for the exchange. Therefore, choice A is true. Choice B is false as FLEX options can be created for individual stocks, stock indexes, and Treasury securities. Choice C is partly true but does not provide a complete picture as the development of FLEX options was not solely a response to the declining OTC market. Choice D is also false as FLEX options aim to bridge the gap between listed options and OTC products, rather than creating a disconnection.

Question 2

Which of the below statements is TRUE?

Accepted Answer

Hedging with futures involves trading off the benefits of a favorable price movement for protection against an adverse price movement. Statements A and B are false.

Question 3

An American option, also referred to as an Atlantic option, can be exercised only on specified dates.

Accepted Answer

An American option can be exercised at any time before the expiration date, whereas a European option can be exercised only on the expiration date.

Question 4

Which of the below statements is FALSE?

Accepted Answer

This statement is false as exchange-traded stock options in the United States can be either European or American style options. American style options can be exercised any time before the expiration date, while European style options can only be exercised on the expiration date.

Question 5

Which of the below statements is FALSE?

Accepted Answer

All three statements are true.

Question 6

What is the dollar value of the S&P 100 contract if the multiple for the S&P 100 Stock Index is $100 and the cash index value for the S&P 100 is 620?

Accepted Answer

The dollar value of the S&P 100 contract can be calculated by multiplying the multiple by the cash index value. 
$100 x 620 = $62,000 
Therefore, the correct answer is B.

Question 7

Suppose that a futures contract with Asset XYZ as the underlying instrument has a futures price equal to $100 and a settlement date one month from now. Which of the below statement is FALSE for an investor who SELLS this futures contract?

Accepted Answer

Option D is false because it inaccurately describes the outcome of selling a futures contract. When an investor sells a futures contract, they lock in a sale price of $100 for Asset XYZ. If the price of Asset XYZ declines, the investor benefits because they can sell it at the higher locked-in price. Conversely, if the price rises, the investor misses out on the potential gains because they are obligated to sell at the agreed-upon price of $100, not avoiding a loss if the price rises.

Question 8

In regards to interest rate options, which of the below statements is TRUE?

Accepted Answer

Besides options on fixed-income securities, investors can obtain OTC options on a yield spread. Option A is false, as interest rate options can be written on cash instruments or futures. Option B is outdated and incorrect, as there are still exchange-traded option contracts whose underlying instrument is a debt instrument. Option C is also incorrect, as the use of over-the-counter options on Treasury, agency debentures, and mortgage-backed securities has actually increased in recent years.

Question 9

The maximum amount that an option buyer can lose is the option price, while the maximum profit that the option writer can realize is the option price; the option buyer has substantial upside return potential, while the option writer has substantial downside risk.

Accepted Answer

This statement is true. The option buyer's maximum loss is limited to the price they paid for the option, while the potential profit is theoretically unlimited. On the other hand, the option writer's maximum profit is limited to the price they received for writing the option, while the potential loss is unlimited. This is because the option writer is obligated to buy or sell the asset at the specified price if the option buyer decides to exercise their option.

Question 10

There are three reasons why futures options on fixed-income securities have largely supplanted options on physicals as the options vehicle used by institutional investors. Which of the below is NOT one of these three reasons?

Accepted Answer

All the reasons listed (A, B, and C) are valid reasons why futures options on fixed-income securities have largely supplanted options on physicals.

Question 11

Which of the below statements is FALSE?

Accepted Answer

This statement is false. In fact, there are stock index options based on both the exercise style (European or American) and the length of the expiration period (weekly, monthly, quarterly, etc.).

Question 12

________ can be used to ________ against a decline in the price of the ________ instrument.

Accepted Answer

A put option gives the holder the right, but not the obligation, to sell the underlying instrument at a predetermined price (strike price) within a specified period of time. This can be used to hedge against a decline in the price of the underlying instrument, as the put option gains value as the underlying instrument's price drops. A call option, on the other hand, gives the holder the right to buy the underlying instrument at a predetermined price, which would not protect against a decline in price. Therefore, the best choice is B, a put option can be used to hedge against a decline in the price of the underlying instrument.

Question 13

In regards to stock index options, which of the below statements is TRUE?

Accepted Answer

Options on futures contracts are indeed the contracts of choice in the interest rate options market, as they provide a way to hedge against or speculate on changes in interest rates with leverage.

Question 14

Which of the below statements is FALSE?

Accepted Answer

This statement is false. Exchange-traded stock options have a standardized quantity of 100 shares per contract.

Question 15

In regards to the mechanics of trading futures options, which of the below statements is FALSE?

Accepted Answer

BThe exchange does not impose margin requirements on the buyer of a futures option once the option price has been paid in full because the maximum loss for the buyer is the premium paid for the option. Therefore, there is no need for further margin from the option buyer, making statements A and B false.

Question 16

In regards to long-term equity anticipation securities (LEAPS), which of the below statements is TRUE?

Accepted Answer

LEAPS contracts are available on individual stocks and some indexes, but they have longer maturities, typically up to 3 years. Therefore, option A and C are incorrect. Option D is also incorrect because index options LEAPS have a multiplier of 10 instead of 100, making them smaller in size compared to standard index options.

Question 17

An option on a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract ________.

Accepted Answer

A futures option gives the buyer the right to buy or sell the underlying futures contract at a designated price (the strike price) at any time during the life of the option, up until expiration.

Question 18

In regards to the mechanics of trading futures options, which of the below statements is FALSE?

Accepted Answer

The answer of In regards to the mechanics of trading...

Question 19

________ grants the buyer the right to sell one designated futures contract to the writer at the exercise price. That is, the option buyer has the right to acquire a short position in the designated futures contract.

Accepted Answer

A put option on a futures contract gives the buyer the right, but not the obligation, to sell the underlying futures contract at a predetermined price (exercise price or strike price) on or before the expiration date. This means the buyer has the option to acquire a short position in the designated futures contract.

Question 20

The Options Clearing Corporation has established standard strike price guidelines for listed options. For stocks ________.

Accepted Answer

For stocks with a price above $100, option strike prices are typically set at $10 intervals according to standard guidelines.

Quiz 27: Options Markets

In regards to FLEX options, which of the below statements is TRUE?

Which of the below statements is TRUE?

An American option, also referred to as an Atlantic option, can be exercised only on specified dates.

Which of the below statements is FALSE?

Which of the below statements is FALSE?

What is the dollar value of the S&P 100 contract if the multiple for the S&P 100 Stock Index is $100 and the cash index value for the S&P 100 is 620?

Suppose that a futures contract with Asset XYZ as the underlying instrument has a futures price equal to $100 and a settlement date one month from now. Which of the below statement is FALSE for an investor who SELLS this futures contract?

In regards to interest rate options, which of the below statements is TRUE?

The maximum amount that an option buyer can lose is the option price, while the maximum profit that the option writer can realize is the option price; the option buyer has substantial upside return potential, while the option writer has substantial downside risk.

There are three reasons why futures options on fixed-income securities have largely supplanted options on physicals as the options vehicle used by institutional investors. Which of the below is NOT one of these three reasons?

Which of the below statements is FALSE?

can be used to against a decline in the price of the instrument.

In regards to stock index options, which of the below statements is TRUE?

Which of the below statements is FALSE?

In regards to the mechanics of trading futures options, which of the below statements is FALSE?

In regards to long-term equity anticipation securities (LEAPS) , which of the below statements is TRUE?

An option on a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract ________.

In regards to the mechanics of trading futures options, which of the below statements is FALSE?

________ grants the buyer the right to sell one designated futures contract to the writer at the exercise price. That is, the option buyer has the right to acquire a short position in the designated futures contract.

The Options Clearing Corporation has established standard strike price guidelines for listed options. For stocks ________.