FIN 325 Chapter 20 LS

Which are derivative securities?
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For a put option on a given security with a given expiration date, the value of the put is ______ when the exercise price is ______.higher, higher lower, lowerLonger-term options traded with expirations ranging up to several years are calledLEAPSAn option that can be exercised only on its expiration date is called a(n) ____ optionEuropeanAn option whose exercise would produce a positive payoff is said to be ____ ____ the moneyThe clearinghouse for options trading, known as the ___ ____ ____ is jointly owned by the exchanges on which stock options are traded.Options Clearing CorporationIn contrast to stock options, _____ _____ do not require that the call writer actually "deliver the index" upon exercise or that the put writer "Purchase the index."index optionsAmerican options are ______ valuable than European options because they offer ______ flexibility regarding when they can be exercised.more , moreWhat is the formula for the value of a put at expiration?Max[X - ST, 0]An investor expects the equity markets to experience a dramatic fall in prices during the next six months. Which of the following positions would result in the more significant losses?writing naked putsWhen an option holder exercises an option, the ______ arranges for a member firm with clients who have written that option to make good on the option obligation.OCCConsider the three strategies depicted: all stocks (A), all options (B), and calls and T-bills (C). Which statements are true about them based on the figure? (Click to enlarge.)-The all-option portfolio (B) has the greatest sensitivity to increases in the value of the underlying security. -The T-bills-plus-option portfolio (C) has the least downside risk.A financial institution has written an option on a broad equity index that expires today and will be in the money. Which of the following is the most likely outcome at expiration?The financial institution will settle the amount owed to the option buyer in cash.What is the payoff of a protective put portfolio?X if ST ≤ X and ST if ST > XDetermine the value of a call option on PJY Inc shares at expiration if the market price of PJY is $33 and the exercise price is $35.$0 The owner has the right to buy at $35 but can do so in the equity market for $33 so this option is worthless.Suppose an investor purchased a put option with exercise price X for premium P on an asset that ends up with a terminal value of ST. The investor will at least break even at expiration if ______. (Note: assume that the time value of money is zero.)ST < X - PWriting an option without an offsetting stock position is referred to as ___ option writingnakedWhich statements are correct based on the figure? (Click to enlarge.)-The loss with a protective put portfolio is limited. -The stock portfolio outperforms the protective put portfolio when the stock price is high.The ______ of a call at expiration equals its ______ less its ______.profit; payoff; premiumKim Jack bought a put option for $5 on shares of Jenn Industries. The exercise price is $65 and the stock price at expiration is $50. Determine the payoff of Jack's option at expiration.15A covered call option consists of ______.owning the stock and writing the callThe purpose of a straddle is to ______.profit from expected volatilityA _____ ____ involves the purchase of one option and the simultaneous sale of another with a different exercise spreadAn investor who regularly writes naked, deep-out-of-the-money puts on an index would be expected to earn ______ gains and ______ losses.a series of small; occasional largeThe equation representing the equilibrium relationship between put and call prices is given by the _____ _____ _____ ____.put-call parity theorumAn investor who regularly writes covered calls on an asset receives _______ and gives up _______.premiums; potentially large gains in the assetTaylor Winn buys a put option for $3 and a call option for $5, both written on the same stock and both with an exercise price of $50. If the stock price at expiration is $60, what is Taylor's profit?2A combination of two or more call options (or two or more puts) on the same stock with differing exercise prices or times to maturity is a(n) _____.spreadIn order for callable bonds to sell near par value at issuance, the borrower is most likely to ______.offer a higher coupon rateA convertible bond has a higher price than a straight bond because ______.the bondholder owns the optionThe put-call parity relationship holds for which types of options?only EuropeanWhich statements are true of warrants?Their exercise results in the creation of new shares. They are often issued in conjunction with another security. There is a cash flow to the firm when the warrant is exercised.IN a _____ loan, the lender may not sue the borrower for further payment if the collateral turns out not to be valuable enough to repay the loannonrecourseA bond that has a call provision is one in which the ______.issuer can repurchase the bondsThe owner of a convertible bond typically has the right but not the obligation to the bonds for shares of stock_____-_____ options are options with payoffs that depend on the average price of the underlying asset during at least some portion of the life of the option.asian-styleWhich portfolios provide a payoff with a guaranteed minimum value and unlimited upside potential?Call and T-bills Protective putAn option issued by the firm to purchase shares of the firm's stock is a(n) _____warrantMany loan arrangements require that the borrower put up ____ to guarantee the loan will be paid back.collateralMatch the exotic option with its description.Asian options Payoffs depend on the average price of the underlying asset Barrier options: Payoffs depend not only on the underlying asset price at expiration but also on whether the asset crossed specified prices pre-expiration Lookback options: Payoffs depend in part on the minimum or maximum price of the underlying asset during the life of the option Digital options: Have fixed payoffs that depend on whether a condition is satisfied by the price of the underlying asset_____-_____ options may be of interest to firms that wish to hedge a profit stream that depends on the average price of a commodity over some period of time.asian style_____ options have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option.lookback_____ options have fixed payoffs that depend on whether a condition is satisfied by the price of the underlying asset.digitalMost Challenging Concepts-Identify exotic options -Understand put option values at expiration -Know options terms