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Question 1 of 10
1. Question
Regarding EFP process, which of the following statements is true?
Correct
EFP process
The EFP process is used by the counterparties to a contract to determine the settlement terms privately, away from the exchange (a so-called ex-pit transaction). The terms differ from standard terms. Exchange rules typically restrict an EFP to those traders who normally deal in the underlying cash commodity, such as energy traders. The parties agree on price and delivery terms, and arrange for and accept physical delivery. The contract is formally settled by the finalization of purchase and sale of the physical commodity (buyer from seller) combined with the offsetting sale and purchase (buyer to seller) of the existing futures position.
Incorrect
EFP process
The EFP process is used by the counterparties to a contract to determine the settlement terms privately, away from the exchange (a so-called ex-pit transaction). The terms differ from standard terms. Exchange rules typically restrict an EFP to those traders who normally deal in the underlying cash commodity, such as energy traders. The parties agree on price and delivery terms, and arrange for and accept physical delivery. The contract is formally settled by the finalization of purchase and sale of the physical commodity (buyer from seller) combined with the offsetting sale and purchase (buyer to seller) of the existing futures position.
Question 2 of 10
2. Question
From the statements below regarding assignment, which one seems to be the most appropriate to you?
Correct
Assignment
Since the counterparties to a contract are unknown to each other (sales and purchases are transacted independently), it becomes the responsibility of the clearinghouse to match buyers (long position holders) with sellers (short position holders). This process is known as assignment, and is completed for each option series separately. An option series is a group of options grouped by type (call or put), expiry date, strike price, and exercise style (American or European). The assignment process of the Chicago Mercantile Exchange clearing organization (CME Clearing) involves assigning option exercises using two methods (random and pro rata), each of which is intended to be fair and equitable. The random method consists of sequential random draws for both legs of the contract from the entire pool of exercisable options of all clearing members. The long position is selected first, followed by the matching short position. The pro rata method assigns options based on the proportion of open long and short interest carried by the clearing members. For example, if clearing member X holds a 40% share of the total open long interest, the firm will be assigned 40% of the exercised options.
Incorrect
Assignment
Since the counterparties to a contract are unknown to each other (sales and purchases are transacted independently), it becomes the responsibility of the clearinghouse to match buyers (long position holders) with sellers (short position holders). This process is known as assignment, and is completed for each option series separately. An option series is a group of options grouped by type (call or put), expiry date, strike price, and exercise style (American or European). The assignment process of the Chicago Mercantile Exchange clearing organization (CME Clearing) involves assigning option exercises using two methods (random and pro rata), each of which is intended to be fair and equitable. The random method consists of sequential random draws for both legs of the contract from the entire pool of exercisable options of all clearing members. The long position is selected first, followed by the matching short position. The pro rata method assigns options based on the proportion of open long and short interest carried by the clearing members. For example, if clearing member X holds a 40% share of the total open long interest, the firm will be assigned 40% of the exercised options.
Question 3 of 10
3. Question
Which of the following statements is true regarding assignment?
Correct
Regarding assignment, the pro rata method assigns options based on the proportion of open long and short interest carried by the clearing members is tue.
Incorrect
Regarding assignment, the pro rata method assigns options based on the proportion of open long and short interest carried by the clearing members is tue.
Question 4 of 10
4. Question
Which of the following statements is false regarding Exercise dates?
Correct
Exercise dates
The rules of each exchange determine the dates on which options can be exercised. For example, options for ethanol futures traded on the Chicago Mercantile Exchange (CME) contain the following specifications:
• Option months: all calendar months
• Last trading day: the last Friday preceding the first notice day of the corresponding futures contract by at least two business days
• Exercise: American style; options may be exercised until 6:00 p.m. CT on any business day the option is traded; in the money options auto exercise at expiration.
• Unexercised ethanol futures options expire at 7:00 p.m. CT on the last day of trading.
Incorrect
Exercise dates
The rules of each exchange determine the dates on which options can be exercised. For example, options for ethanol futures traded on the Chicago Mercantile Exchange (CME) contain the following specifications:
• Option months: all calendar months
• Last trading day: the last Friday preceding the first notice day of the corresponding futures contract by at least two business days
• Exercise: American style; options may be exercised until 6:00 p.m. CT on any business day the option is traded; in the money options auto exercise at expiration.
• Unexercised ethanol futures options expire at 7:00 p.m. CT on the last day of trading.
Question 5 of 10
5. Question
Regarding variation of option premium, which of the following statements is true?
Correct
Variation of option premium
Option premiums typically vary based upon the amount of exercise flexibility enjoyed by traders. Since American style options can be exercised on any trading day up to the expiration date, traders are willing to pay a higher premium. In contrast, the limited flexibility afforded by European options tends to reduce the premium value.
Incorrect
Variation of option premium
Option premiums typically vary based upon the amount of exercise flexibility enjoyed by traders. Since American style options can be exercised on any trading day up to the expiration date, traders are willing to pay a higher premium. In contrast, the limited flexibility afforded by European options tends to reduce the premium value.
Question 6 of 10
6. Question
From the statements below regarding margin requirements for option with underlying futures contract, which one seems to be the most appropriate to you?
Correct
Margin requirements for option with underlying futures contract
The exercise of an option with an underlying futures contract results in the receipt of a long or short futures position based on the type of option (put or call, long or short). The receipt of the futures contract necessitates an immediate mark to market based on the current futures price and the option strike price. If the futures position is not immediately liquidated (closed out), it becomes a new position, necessitating the posting of an initial margin per the rules of the exchange.
Incorrect
Margin requirements for option with underlying futures contract
The exercise of an option with an underlying futures contract results in the receipt of a long or short futures position based on the type of option (put or call, long or short). The receipt of the futures contract necessitates an immediate mark to market based on the current futures price and the option strike price. If the futures position is not immediately liquidated (closed out), it becomes a new position, necessitating the posting of an initial margin per the rules of the exchange.
Question 7 of 10
7. Question
Which of the following statements is true regarding market order and stop order?
Correct
Market order and stop order
If a market order is placed, the intent of the trader is to execute the order immediately at the best possible price. A floor broker will fill the order based upon the prevailing offer, bid, or ask. When a stop order is placed, the order is not executed until either a lower or upper trigger price is reached. At that point, the order is executed at the next market price.
Incorrect
Market order and stop order
If a market order is placed, the intent of the trader is to execute the order immediately at the best possible price. A floor broker will fill the order based upon the prevailing offer, bid, or ask. When a stop order is placed, the order is not executed until either a lower or upper trigger price is reached. At that point, the order is executed at the next market price.
Question 8 of 10
8. Question
Which of the following statements is true regarding stop order?
Correct
Stop order
A stop order is a market order that becomes effective only after a certain trigger price is reached. In effect, a stop order converts to a market order at the trigger price, and the transaction is executed at the next market price. A sale stop order is priced lower than the present market to avoid losses due to continuing price declines. Conversely, a buy stop order is priced above market to avoid continuing price increases.
Incorrect
Stop order
A stop order is a market order that becomes effective only after a certain trigger price is reached. In effect, a stop order converts to a market order at the trigger price, and the transaction is executed at the next market price. A sale stop order is priced lower than the present market to avoid losses due to continuing price declines. Conversely, a buy stop order is priced above market to avoid continuing price increases.
Question 9 of 10
9. Question
Which of the following statements is false regarding limit order and stop limit order?
Correct
Limit order and stop limit order
A limit order is, in effect, a market order with upper and lower price parameters. The order establishes a floor or ceiling on the price at which the trade can be executed. The floor trader is expected to achieve either the limit price or better (OB). A stop limit order combines the characteristics of a trigger price (as in a stop order) and a floor or ceiling price (as in a limit order). Once the market price reaches the trigger price, the trader is instructed to buy or sell at the next most favorable price above the floor or below the ceiling.
Incorrect
Limit order and stop limit order
A limit order is, in effect, a market order with upper and lower price parameters. The order establishes a floor or ceiling on the price at which the trade can be executed. The floor trader is expected to achieve either the limit price or better (OB). A stop limit order combines the characteristics of a trigger price (as in a stop order) and a floor or ceiling price (as in a limit order). Once the market price reaches the trigger price, the trader is instructed to buy or sell at the next most favorable price above the floor or below the ceiling.
Question 10 of 10
10. Question
Regarding MIT order, which of the following statements is true?
Correct
MIT order
A market if touched order sets both a lower and an upper trigger price, as well as a subsequent floor and ceiling price. At the point that the market price reaches a trigger price (the touch point), the trigger price in effect becomes either the floor price (for a buy) or the ceiling price (for a sale). That is, the trading instructions are to execute the buy at a price not higher than the market (trigger) price. The sale is executed at a price not lower than the market price. If trading reaches a lock limit status (meaning the upper or lower limit of daily trading has been reached) either at or before the trigger price, the trade will not be executed, and will expire at the end of the trading day.
Incorrect
MIT order
A market if touched order sets both a lower and an upper trigger price, as well as a subsequent floor and ceiling price. At the point that the market price reaches a trigger price (the touch point), the trigger price in effect becomes either the floor price (for a buy) or the ceiling price (for a sale). That is, the trading instructions are to execute the buy at a price not higher than the market (trigger) price. The sale is executed at a price not lower than the market price. If trading reaches a lock limit status (meaning the upper or lower limit of daily trading has been reached) either at or before the trigger price, the trade will not be executed, and will expire at the end of the trading day.
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