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Question 1 of 10
1. Question
Which of the following statements is true regarding synthetic option?
Correct
Synthetic option
A long call and a short put will be profitable in a period of rising prices. The equivalent synthetic of each is as follows:
• Long Call = Long Futures + Long Put
• Short Put = Long Futures + Short Call
A long put and a short call will be profitable in a period of declining prices. The equivalent synthetic of each is as follows:
• Long Put = Short Futures + Long Call
• Short Call = Short Futures + Short PutIncorrect
Synthetic option
A long call and a short put will be profitable in a period of rising prices. The equivalent synthetic of each is as follows:
• Long Call = Long Futures + Long Put
• Short Put = Long Futures + Short Call
A long put and a short call will be profitable in a period of declining prices. The equivalent synthetic of each is as follows:
• Long Put = Short Futures + Long Call
• Short Call = Short Futures + Short Put -
Question 2 of 10
2. Question
From the statements below regarding conversion, which one seems to be the most appropriate to you?
Correct
Conversion
Conversion is the term used when a trader, recognizing pricing inconsistencies between the two components of a synthetic position and the related outright position, combines short and long positions to profit from the arbitrage. For example, in a situation where the price of a long call is unfavorable compared to that of the synthetic components of a long futures and a long put, the trader would sell the call and buy the futures and the put. This also has the effect of forcing prices back to parity.Incorrect
Conversion
Conversion is the term used when a trader, recognizing pricing inconsistencies between the two components of a synthetic position and the related outright position, combines short and long positions to profit from the arbitrage. For example, in a situation where the price of a long call is unfavorable compared to that of the synthetic components of a long futures and a long put, the trader would sell the call and buy the futures and the put. This also has the effect of forcing prices back to parity. -
Question 3 of 10
3. Question
Which of the following statements is false regarding conversion?
Correct
Conversion
Conversion is the term used when a trader, recognizing pricing inconsistencies between the two components of a synthetic position and the related outright position, combines short and long positions to profit from the arbitrage. For example, in a situation where the price of a long call is unfavorable compared to that of the synthetic components of a long futures and a long put, the trader would sell the call and buy the futures and the put. This also has the effect of forcing prices back to parity.Incorrect
Conversion
Conversion is the term used when a trader, recognizing pricing inconsistencies between the two components of a synthetic position and the related outright position, combines short and long positions to profit from the arbitrage. For example, in a situation where the price of a long call is unfavorable compared to that of the synthetic components of a long futures and a long put, the trader would sell the call and buy the futures and the put. This also has the effect of forcing prices back to parity. -
Question 4 of 10
4. Question
From the statements below regarding reverse conversion, which one seems to be inappropriate to you?
Correct
Reverse conversion
Reverse conversion and conversion are opposite positions, but the desired result is the same. For example, in a situation where the long put is priced unfavorably compared to the synthetic components of a short futures and a long call, the trader would sell the put, buy the call, and sell the futures. As with the conversion process, reverse conversion has the effect of forcing prices back to parity.Incorrect
Reverse conversion
Reverse conversion and conversion are opposite positions, but the desired result is the same. For example, in a situation where the long put is priced unfavorably compared to the synthetic components of a short futures and a long call, the trader would sell the put, buy the call, and sell the futures. As with the conversion process, reverse conversion has the effect of forcing prices back to parity. -
Question 5 of 10
5. Question
Which of the following statements is true regarding put/call parity in options pricing?
Correct
Put/call parity in options pricing
Put/call parity is related to the practice of conversion/reverse conversion, which allows traders to take advantage of pricing inconsistencies between synthetic options and the related outright contract. The principle of put/call parity is that the price of the two combined contracts of a synthetic must be equal to the price of the outright contract. For example, a synthetic long call is a combination of a long futures and a long put. Parity means that the combined price of the long futures and the long put is always the same as that of the outright long call. Whenever inconsistencies arise, the process of conversion or reverse conversion will force the price back to parity.Incorrect
Put/call parity in options pricing
Put/call parity is related to the practice of conversion/reverse conversion, which allows traders to take advantage of pricing inconsistencies between synthetic options and the related outright contract. The principle of put/call parity is that the price of the two combined contracts of a synthetic must be equal to the price of the outright contract. For example, a synthetic long call is a combination of a long futures and a long put. Parity means that the combined price of the long futures and the long put is always the same as that of the outright long call. Whenever inconsistencies arise, the process of conversion or reverse conversion will force the price back to parity. -
Question 6 of 10
6. Question
Regarding put/call parity in options pricing, which of the following statements is false?
Correct
Put/call parity in options pricing
Put/call parity is related to the practice of conversion/reverse conversion, which allows traders to take advantage of pricing inconsistencies between synthetic options and the related outright contract. The principle of put/call parity is that the price of the two combined contracts of a synthetic must be equal to the price of the outright contract. For example, a synthetic long call is a combination of a long futures and a long put. Parity means that the combined price of the long futures and the long put is always the same as that of the outright long call. Whenever inconsistencies arise, the process of conversion or reverse conversion will force the price back to parity.Incorrect
Put/call parity in options pricing
Put/call parity is related to the practice of conversion/reverse conversion, which allows traders to take advantage of pricing inconsistencies between synthetic options and the related outright contract. The principle of put/call parity is that the price of the two combined contracts of a synthetic must be equal to the price of the outright contract. For example, a synthetic long call is a combination of a long futures and a long put. Parity means that the combined price of the long futures and the long put is always the same as that of the outright long call. Whenever inconsistencies arise, the process of conversion or reverse conversion will force the price back to parity. -
Question 7 of 10
7. Question
Which of the following statements is true regarding roll forward?
Correct
Roll forward
Roll forward is a trading strategy in which expiring contracts are liquidated and a new contract is immediately purchased. In effect, each expiring contract is rolled forward.Incorrect
Roll forward
Roll forward is a trading strategy in which expiring contracts are liquidated and a new contract is immediately purchased. In effect, each expiring contract is rolled forward. -
Question 8 of 10
8. Question
Regarding call option spreads, which of the following statements is true?
Correct
Call option spreads
An option spread is a position involving the purchase of one option and the sale of another. The three types of call option spreads are:
• Price spread – A call is purchased at one price, while a different call is sold at a different price.
• Calendar – A call that expires on a certain date is purchased, while another call that expires on a different date is sold.
• Diagonal – This is a combination of a price spread and a calendar spread. Both the short and long positions have different prices and expiry dates.Incorrect
Call option spreads
An option spread is a position involving the purchase of one option and the sale of another. The three types of call option spreads are:
• Price spread – A call is purchased at one price, while a different call is sold at a different price.
• Calendar – A call that expires on a certain date is purchased, while another call that expires on a different date is sold.
• Diagonal – This is a combination of a price spread and a calendar spread. Both the short and long positions have different prices and expiry dates. -
Question 9 of 10
9. Question
From the statements below regarding option put spread and option call spread, which one seems to be the most appropriate to you?
Correct
Option put spread and option call spread
Both puts and calls can be used to develop a spread to protect underlying positions and thereby minimize risk. Like calls, puts can be used to structure spreads (a combination of short and long positions) based on price, expiry dates, or a combination thereof.Incorrect
Option put spread and option call spread
Both puts and calls can be used to develop a spread to protect underlying positions and thereby minimize risk. Like calls, puts can be used to structure spreads (a combination of short and long positions) based on price, expiry dates, or a combination thereof. -
Question 10 of 10
10. Question
Which of the following statements is false regarding vertical credit spread and vertical debit spread?
Correct
Vertical credit spread and vertical debit spread
A vertical credit spread and a vertical debit spread are said to be mirror images of each other. Both credit and debit spreads are considered vertical because they use the same option type (call or put) in two different positions (long or short). Both are designed such that the maximum profit and loss are limited by the price range of the two option types (puts or calls). A credit spread (bull put or bear call) limits profitability to the net premium income, and it limits losses to the adverse change in price. A debit spread is a mirror image of the credit spread because it limits losses to the net premium expense, and it also limits profitability to the beneficial change in price.Incorrect
Vertical credit spread and vertical debit spread
A vertical credit spread and a vertical debit spread are said to be mirror images of each other. Both credit and debit spreads are considered vertical because they use the same option type (call or put) in two different positions (long or short). Both are designed such that the maximum profit and loss are limited by the price range of the two option types (puts or calls). A credit spread (bull put or bear call) limits profitability to the net premium income, and it limits losses to the adverse change in price. A debit spread is a mirror image of the credit spread because it limits losses to the net premium expense, and it also limits profitability to the beneficial change in price.