Derivatives

In a forward contract, the party in a LONG position has the obligation to:

• Buy the underlying asset at maturity at the agreed price.

• sell the underlying asset at maturity at the agreed price.

• Decide whether to buy or sell the underlying asset at maturity.
  

• Cancel the contract before maturity.

Which of the following describes a key feature of options?

• Both parties have an obligation.

• The buyer pays a premium upfront.

• Options are always exercised at maturity.

• options cannot be traded on exchanges.

The price of a forward contract at initiation is:

• Equal to the spot price of the asset.

• Higher than the spot price of the asset.

• Determined such that the initial value of the contract is zero.

• Equal to the strike price.

The intrinsic value of a call option is:

• The premium paid for the option.

• The difference between the strike price and the spot price, if positive.

• The difference between the spot price and the strike price, if positive.

• Always zero for out-of-the-money options.

The time value of an option is:

• Always 0 at expiration

• The difference between the intrinsic value and the market price of the option.

Which factor does NOT influence the price of an option?

• Volatility of the underlying asset.

• Time to expiration.

• The risk-free interest rate.

• The currency exchange rate.

The main purpose of futures and forwards is to:

• Speculate on price movements.

• Hedge against price risk.

• Generate dividends.

• Avoid transaction costs

What is the primary advantage of using options instead of forwards or futures for hedging?

• Lower transaction costs.

• No obligation to exercise the contract.

• No margin requirements.

• Fixed upfront costs.

A butterfly spread is best described as:

• A combination of calls and puts on different underlying assets.

• A limited-risk, limited-reward strategy involving three strike prices.

• A strategy that benefits from high volatility in the market.

• A speculative strategy with unlimited profit potential.

Write a MC -type of question (indicating the correct answer as well),
Difficulty: realistically, it could be included in the exam.