Nonequity Options

Question 1

For most world currency quotes, the decimal must be moved how many places to the left to convert to U.S. dollars?

Answer 1

Two places to the left

Question 2

An investor buys an OEX May 475 call at 10. What is his strategy?

Answer 2

Bullish on the S and P 100 Index

Question 3

What is the primary use of VIX options?

Answer 3

To give individual investors the ability to trade market volatility

Question 4

What could an investor do if she expects the market to decline and volatility to increase?

Answer 4

Buy VIX calls

Question 5

An investor, believing interest rates will rise, could profit by taking what yield-based option position?

Answer 5

Buy yield-based calls or write yield-based puts

Question 6

Identify the acronym: VIX

Answer 6

CBOE’s Volatility Index

Question 7

An investor buys an OEX May 475 call at 10. What is his breakeven point?

Answer 7

475 + 10 = 485 (strike price plus the premium or CALL UP)

Question 8

An investor buys an OEX May 475 call at 10. What is his maximum gain?

Answer 8

Unlimited

Question 9

Yield-based options are ______-based.

Answer 9

Yield-based options are yield-based (rather than based on price).

Question 10

What could an investor do if she expects the market to rise and volatility to decrease?

Answer 10

Buy VIX puts

Question 11

There is an inverse relationship between the movement of a world currency and the _____________.

Answer 11

There is an inverse relationship between the movement of a world currency and the U.S. dollar.

Question 12

To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved ______ places to the left.

Answer 12

To convert the terms of a Japanese yen contract to U.S. dollars, the decimal is moved four places to the left.

Question 13

What is the VIX?

Answer 13

The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility

Question 14

Is there any difference between the exercise of an index option and an equity option?

Answer 14

Yes, index options are cash-settled while equity options are settled by delivery of a specific security.

Question 15

What is the underlying instrument used to calculate the VIX?

Answer 15

Real-time S and P 500 option bid/ask quotes weighted to a constant 30-day measure of expected volatility

Question 16

What are the hours of operation for the Interbank Market?

Answer 16

24 hours a day

Question 17

Equity options are based on a 100 share multiplier, while index options are based on a $______ multiplier.

Answer 17

Equity options are based upon a 100 share multiplier, while index options are based on a $100 multiplier.

Question 18

Volatility tends to increase during a ___________ market.

Answer 18

Volatility tends to increase during a declining market.

Question 19

How is the premium for a world currency option calculated?

Answer 19

Contract size x the premium (with decimal moved appropriately)

Question 20

What is the settlement for spot trades?

Answer 20

Two business days

Question 21

VIX options use a __________ style exercise and settle in ______.

Answer 21

VIX options use a European style exercise and settle in cash.

Question 22

An investor buys an OEX May 475 call at 10. What is his maximum loss?

Answer 22

The premium of $1,000 (the value of 10 x $100)

Question 23

True or False: If an investor expects the U.S. dollar to strengthen, she could profit by buying U.S. dollar calls.

Answer 23

False. There are no U.S. dollar calls or puts issued; therefore, all answers must be based on a world currency.

Question 24

When does volatility tend to increase?

Answer 24

When the market (S and P 500) drops abruptly

Question 25

World currencies trade in the _____________________.

Answer 25

World currencies trade in the Interbank Market.

Question 26

What are two uses of index options?

Answer 26

To speculate on market movement or to hedge a portfolio

Question 27

A _______-based index measures the movement of a particular sector or industry.

Answer 27

A narrow-based index measures the movement of a particular sector or industry.

Question 28

True or False: The buyer of a British pound call will profit if the British pound rises with a falling U.S. dollar.

Answer 28

True

Question 29

True or False: The Interbank Market is a fully regulated and centralized market.

Answer 29

False. The Interbank Market is unregulated and decentralized.

Question 30

A _______-based index measures the market as a whole.

Answer 30

A broad-based index measures the market as a whole.

Question 31

What should an investor do on the VIX if she anticipates an increase in volatility?

Answer 31

Buy VIX Calls. If volatility increases, the underlying VIX will rise and the calls will increase in value.

Question 32

Upon exercise, what must index option sellers deliver to the buyers?

Answer 32

The in-the-money amount of the contract (based on the close) multiplied by $100