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Question 1 of 10
1. Question
Which of the following statements is true regarding options contract vs. futures contract?
Correct
Options contract vs. futures contract
A trader who purchases an options contract has the right but not the obligation to purchase or sell a security prior to an expiration date. A futures contract is an obligation to take some action related to the underlying commodity. The trader must deliver the commodity, accept delivery, settle for cash, or liquidate (offset). In contrast, the holder of an options contract has a right to take some action related to the underlying commodity, but is not obligated to do so. In practice, in the money contracts will be executed, while out of the money contracts are worthless, and will therefore be allowed to expire.
Incorrect
Options contract vs. futures contract
A trader who purchases an options contract has the right but not the obligation to purchase or sell a security prior to an expiration date. A futures contract is an obligation to take some action related to the underlying commodity. The trader must deliver the commodity, accept delivery, settle for cash, or liquidate (offset). In contrast, the holder of an options contract has a right to take some action related to the underlying commodity, but is not obligated to do so. In practice, in the money contracts will be executed, while out of the money contracts are worthless, and will therefore be allowed to expire.
Question 2 of 10
2. Question
Which of the following statements is not the example of options contracts sectors ?
Correct
Sectors that have commodities for which options contracts are available
Options contracts are available for many (but not all) of the major commodities within the following sectors:
• agricultural (corn, soybeans, wheat, live cattle, lean hogs)
• energy (crude oil, natural gas, heating oil, gasoline)
• equity index (S&P 500, NASDAQ, DJIA)
• foreign exchange (JPY, EUR, GBP, AUD, CAD, CHF:USD)
• interest rates (Eurodollar, T-note, T-bond)
• metals (gold, silver, copper, platinum, palladium)
Incorrect
Sectors that have commodities for which options contracts are available
Options contracts are available for many (but not all) of the major commodities within the following sectors:
• agricultural (corn, soybeans, wheat, live cattle, lean hogs)
• energy (crude oil, natural gas, heating oil, gasoline)
• equity index (S&P 500, NASDAQ, DJIA)
• foreign exchange (JPY, EUR, GBP, AUD, CAD, CHF:USD)
• interest rates (Eurodollar, T-note, T-bond)
• metals (gold, silver, copper, platinum, palladium)
Question 3 of 10
3. Question
Which of the following statements is false regarding party to option contract with the greatest risk of loss?
Correct
Party to option contract with the greatest risk of loss
The seller or writer of an option bears the full obligation to meet the rights of the buyer (upon exercise), and thus has the greatest risk of loss. A seller or writer who engages in an option without an underlying position in the cash market is said to be “naked.” A subsequent exercise by the holder creates even greater risk for the seller, as the underlying commodity must be acquired in order to fulfill the contract.
Incorrect
Party to option contract with the greatest risk of loss
The seller or writer of an option bears the full obligation to meet the rights of the buyer (upon exercise), and thus has the greatest risk of loss. A seller or writer who engages in an option without an underlying position in the cash market is said to be “naked.” A subsequent exercise by the holder creates even greater risk for the seller, as the underlying commodity must be acquired in order to fulfill the contract.
Question 4 of 10
4. Question
Regarding puts and calls from perspectives of buyers and sellers/writers, which of the following statements is true?
Correct
Puts and calls from perspectives of buyers and sellers/writers
A buyer of a call has the right to buy the underlying commodity, and seeks to benefit from rising prices. A buyer of a put has the right to sell the underlying commodity, and seeks to benefit from declining prices. A seller of a call has the obligation to sell the underlying commodity if the call is exercised, and seeks to benefit from premium income. A seller of a put has the obligation to buy the underlying commodity if the put is exercised, and also seeks to benefit from premium income.
Incorrect
Puts and calls from perspectives of buyers and sellers/writers
A buyer of a call has the right to buy the underlying commodity, and seeks to benefit from rising prices. A buyer of a put has the right to sell the underlying commodity, and seeks to benefit from declining prices. A seller of a call has the obligation to sell the underlying commodity if the call is exercised, and seeks to benefit from premium income. A seller of a put has the obligation to buy the underlying commodity if the put is exercised, and also seeks to benefit from premium income.
Question 5 of 10
5. Question
From the statements below regarding long and short positions, which one seems to be the most appropriate to you?
Correct
Long and short positions
A buyer or holder of an option has the right to exercise it, but will do so only if it is profitable (in the money). If the option remains out of the money, the buyer/holder will allow it to expire, as it is worthless. Risk is minimal. The opportunity for leverage increases as the price of the underlying commodity undergoes favorable changes. Loss is limited to the premium paid to buy the position. The seller bears the risk of exercise, and is obligated to deliver. Leverage is somewhat nonexistent, as the profit is limited to the premium received from the buyer; the risk of loss can be substantial if changes in pricing are unfavorable.
Incorrect
Long and short positions
A buyer or holder of an option has the right to exercise it, but will do so only if it is profitable (in the money). If the option remains out of the money, the buyer/holder will allow it to expire, as it is worthless. Risk is minimal. The opportunity for leverage increases as the price of the underlying commodity undergoes favorable changes. Loss is limited to the premium paid to buy the position. The seller bears the risk of exercise, and is obligated to deliver. Leverage is somewhat nonexistent, as the profit is limited to the premium received from the buyer; the risk of loss can be substantial if changes in pricing are unfavorable.
Question 6 of 10
6. Question
Which of the following statements is false regarding long and short positions?
Correct
Long and short positions
A buyer or holder of an option has the right to exercise it, but will do so only if it is profitable (in the money). If the option remains out of the money, the buyer/holder will allow it to expire, as it is worthless. Risk is minimal. The opportunity for leverage increases as the price of the underlying commodity undergoes favorable changes. Loss is limited to the premium paid to buy the position. The seller bears the risk of exercise, and is obligated to deliver. Leverage is somewhat nonexistent, as the profit is limited to the premium received from the buyer; the risk of loss can be substantial if changes in pricing are unfavorable.
Incorrect
Long and short positions
A buyer or holder of an option has the right to exercise it, but will do so only if it is profitable (in the money). If the option remains out of the money, the buyer/holder will allow it to expire, as it is worthless. Risk is minimal. The opportunity for leverage increases as the price of the underlying commodity undergoes favorable changes. Loss is limited to the premium paid to buy the position. The seller bears the risk of exercise, and is obligated to deliver. Leverage is somewhat nonexistent, as the profit is limited to the premium received from the buyer; the risk of loss can be substantial if changes in pricing are unfavorable.
Question 7 of 10
7. Question
Regarding put and call actions, which of the following statements is true?
Correct
Put and call actions
A call is an option to buy, and it would be exercised at any price above the strike price. A put is an option to sell, and it would be exercised at any price below the strike price.
Incorrect
Put and call actions
A call is an option to buy, and it would be exercised at any price above the strike price. A put is an option to sell, and it would be exercised at any price below the strike price.
Question 8 of 10
8. Question
From the statements below regarding option price, which one seems to be the most appropriate to you?
Correct
Option price
The intrinsic value of an option is the difference between the market price of the underlying commodity and the strike price if the option is exercised (the amount by which the option is in the money). Another factor influencing the price of an option is the time value, which is essentially the probability that an option will reach in the money status. For example, two options with the same strike price would be expected to be priced differently depending upon the length of time to expiration. As an option approaches its expiration date, the time value diminishes and approaches zero.
Incorrect
Option price
The intrinsic value of an option is the difference between the market price of the underlying commodity and the strike price if the option is exercised (the amount by which the option is in the money). Another factor influencing the price of an option is the time value, which is essentially the probability that an option will reach in the money status. For example, two options with the same strike price would be expected to be priced differently depending upon the length of time to expiration. As an option approaches its expiration date, the time value diminishes and approaches zero.
Question 9 of 10
9. Question
Which of the following statements is false regarding single security?
Correct
Single security
The Commodity Futures Modernization Act (CFMA) includes authorization for single security (or stock) futures as a new kind of equity/futures hybrid security. Single security (or stock) futures in the U.S. authorized by the CFMA represent contracts for lots of multiple shares of a single security (i.e. 100 shares), such as common stock, American depository receipts (ADRs), exchange traded funds (ETFs), and closed end mutual funds (CEMFs). Contracts must be settled through delivery; the seller must make and the buyer must accept delivery. Margin requirements are regulated by statutes rather than by individual exchanges. Trading activity is subject to the regulations of both the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Enforcement is delegated to the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA).
Incorrect
Single security
The Commodity Futures Modernization Act (CFMA) includes authorization for single security (or stock) futures as a new kind of equity/futures hybrid security. Single security (or stock) futures in the U.S. authorized by the CFMA represent contracts for lots of multiple shares of a single security (i.e. 100 shares), such as common stock, American depository receipts (ADRs), exchange traded funds (ETFs), and closed end mutual funds (CEMFs). Contracts must be settled through delivery; the seller must make and the buyer must accept delivery. Margin requirements are regulated by statutes rather than by individual exchanges. Trading activity is subject to the regulations of both the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Enforcement is delegated to the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA).
Question 10 of 10
10. Question
Regarding options offset prior to settlement, which of the following statements is true?
Correct
Options offset prior to settlement
Options can be offset prior to settlement (assuming the appropriate terms are available in the market), but only through the purchase or sale of the same type of option. That is, a long put can only be offset with a short put; a long call can only be offset with a short call.
Incorrect
Options offset prior to settlement
Options can be offset prior to settlement (assuming the appropriate terms are available in the market), but only through the purchase or sale of the same type of option. That is, a long put can only be offset with a short put; a long call can only be offset with a short call.
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