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Securities Analysis
FINAL
| Question | Answer |
|---|---|
| LEAPS | long term options traded with expiration ranging up to three years. (Long term equity anticipation securities) |
| American Option | Can be exercised on or before its expiration date. |
| European option | Can be exercised only at expiration. |
| which are more valuable American or European Option? Why? | American, because they can be exercised for a longer time period and are more available. |
| what are the most common traded options in the US? | American, with the exception of Foreign currency and some stock index options. |
| OCC | Option Clearing Corporation, the clearinghouse for options trading is jointly owned by the exchanges on which stock options are traded. The OCC places itself between the traders and the buyer. |
| How is the OCC able to guarantee option contracts between parties? | Options writers are required to post margin to guarantee that they can fulfill their contract obligations. The amount depends on the option. |
| when are put options worth more | when the exercise price is higher. |
| how long do most exchange traded options have until they expire? | fairly short, ranging up to only several months for larger firms and stock indexes they can last up to 3 years. (these are called LEAPS - Long term equity anticiPation Securities |
| American option | can be exercised on or before its expiration |
| european option | can be exercised only at expiration. |
| which is more valuable American or European options? | American-because you have more leeway. |
| What type of options are most popular in the US | American. Foreign currency and some stock index options are notable exceptions to this rule. |
| Index options | a coll or put based on a stock market index such as the S&P 500 or the NYSE index. They are traded on several broad based indexes as well as on several industry-specific indexes. |
| how are index options different from that of stock options? | index options do not require theat the call writer actually deliver the index upon exercise or that the put writer purchase the index. Instead, a cash settlement procedure is used. |
| what are the most actively traded contracts with the CBOE (options) | S&P 100 (OEX), S&P 500 (SPX), and the Dow Jones Industrial average (DJX) together they dominate the CBOE |
| Futures Options | give their holders the right to buy or sell a specified futures contract using as a futures price the exercise price of the option. The option is written on the futures price itself |
| Foreign currency options | a currency options offers the right to buy or sell a quantity of foreign currency for a specified amount of domestic currency. |
| How are foreign currency options quoted? | in cents or fractions of a cent per unit of foreign currency. |
| What is the difference between currency options and currency futures | opt provide payoffs that depend on the diff between the exer price and the exchange rate at maturity, futures are foreign exch. futures options that have payoff that depend on the diff between the exer price and the exch rate futures price at maturity. |
| what is more popular the currency futures or currency options? | by far currency future options |
| put options | conveys the right to sell an asset at the exercise price. The holder will not exercise the option unless the asset price is less than the exercise price. |
| writing naked puts | writing a put without an offsetting short position in the stock for hedging purposes, it exposes the writer to losses if the market falls. |
| Is purchasing call options bullish or bearish? | this is a bullish strategy, the calls provide profits when stock prices increase. |
| Is purchasing put options bullish or bearish? | this is a bearish strategy, the opposite is true for writing puts that is bullish. |
| why might a option purchase be preferable to that of a stock purchase? | 1. options offer leverage-their values respond more than proportionately to changes in the stock value. |
| protective put | an asset combined with a put option that guarantees minimum proceeds equal to the put's exercise price. (this will limit loss) |
| risk management | strategies to limit the risk of a portfolio; derivative securities can be used for risk management. |
| covered calls | writing a call on an asset together with buying the asset. |
| straddle | a combination of a call and a put, each with the same exercise price and expiration date. |
| long straddle | is established by buying both a call and a put, each with same X price, and the same exp date. useful for investors who believe a stock will move a lot in price but are uncertain about the direction of the move. this position will do well despite mkt. |
| strip | is two puts and one call |
| strap | is two calls and one put |
| spread | a combination of two or more call options (or two or more puts) on the same stock with differing exercise prices or times of maturity |
| money spread | involves the purchase of one option and the simultaneous sale of another with a different X price. |
| time spread | refers to the sale and purchase of options with differing expiration dates |
| bullish spread | the payoff either increases or is unaffected by stock price increases; holders benefit from stock price increases |
| collars | an options strategy that brockets the value of a portfolio between two bounds. (writing a call and a put on the same stock that offset each other.) |
| callable bonds | essentially a sale of a bond to an investor and the investor selling a call option back to the firm |
| convertable security | gives the holder the right to exchange each bond or share of preferred stock for a fixed # of shares of common stock regardless of the market price at the time. |
| forced a conversion | the bond issuer usually has a call option on a convertable bond, when they call the holder has a month to convert, this usually forces conversion. |
| warrants | essentially call options issued by a firm. One important difference between calls and warrants is thaqt exercise of a warrant requires the firm to issue a new share of stock to satisfy its obligation-total # of shares outstanding increases. |
| sweetner | warrants issued with bonds. |
| detachable warrants | warrants sold separately of bonds. |
| fully diluted earnings per share | annual reports must provide earnings per share figures und the assumption that all convertible sicurities and warrants are exercised. |
| nonrecourse loan | give the lender no recourse beyond the right to collateral, even if the collateral turns out not to be valuable enough to repay the loan. |
| What can bankrupcy mean for a firm's assets to debt ration? | that the assets of the firm are insufficient to satisfy the claims against it. |
| exotic options | many options today hve terms that would have been highly unusual even a few years ago |
| Asian options | options with payoffs that depend on the average (rather than the final) price of the underlying asset during at least some portion of the life of the options. |
| Barrier Options | have payoffs that depend not only on some asset price at option exp but also on whether the underlying asset price has crossed through some barrier. Ex. if a stock price falls below a certain price itis deemed "worthless". |
| lookback Options | have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option. |
| currency translated options | have ither asset or exercise prices denominated in a foreign currency. It could allow you to fix the exchange rate at which you could convert back into dollars. |
| digital options | also called binary or bet options, have fixed payoffs that depend on whether a condition is satisfied by the price of the underlying asset. Like if the stock price @ maturity exceeds X price. |
| intrinsic value | stock price minus exercise price, or the profit thaqt could be attained by immediate exercise of an in the money call option |
| time value | difference between an option's price and its intrinsic value |
| what happens to the value of an option as the stock price increases? | The option always increases in value with the stock price. it increases in price one for one with the stock price |
| what are 6 factors that should affect the value of a calle option? | stock price, exercise price, volatility of the stock price, time to expiration, interest rate, dividend rate of stock |
| how does volitility affect call option value | call option value increases with the volatility of the underlying stock. |
| t or f Many new derivative securities introduced in the last 40 yrs can be seen as risk mgmt tools for a new era of increased volatility | true |
| T or F | active portfolio mgmt is soncistent with the efficient market hypothesis in that it calls for holding diversified portifolios without spending effort or resources attemption to improve investement performance through security analysis (false) |
| t or f in a situation where risk is well specified, an investor with diminishing marginal utility should be risk adverse. | true |
| t or f | suppose two payoff paterns, A and B have the same expected $$ payoffs. Further assume that A is riskier than B. Then A should have a lower rate of return than B because risk-avers investors would pay lower price for A than for B. (false) |
| T or F the main difference between spot and future contracts is the timing of delivery of the underlying asset | true |
| Most U.S. municipal bonds are serial issues which are subject to state and local taxes when they are issued in the investor's home state. | false |
| t or f since revenue bonds are safer than general obligation bonds, in general the returns on revenue bonds are lower than those of general obligation bonds. | false |
| t or f a European option is an option contract that may be exercised at any time between the date of purchse and the expiration date. | false |
| true or false | if the market prices of each of the 30 stocks in the DJIA indes all change by the same percentage amount during a given day, the stock which will have the greatest impact on the index is the one whose total equity has the highest market value. (false) |
| t or f an equallyu weighted indicator series is also known as a price weighted indicator series. | false |
| t or f most of the stock market indexes are (market) value-weighted indexes. | true |
| t or f it has been observed that on average IPOs yield abnormally positive short-term returns, assuming a purchase at the offering price | true |
| t or f the member of the NRSE who acts as a dealer on assigned stocks is known as a floor broker. | false |
| t or f | specialists are expected to buy stocks when market is declining and there are excess sell orders to maintain a fair and orderly market (true) |
| t or f Electronic commo netwroks (ECN's) are computerized trading networks, where they match buy and sell orders that are entered electronically by customers | true |
| t or f | suppose the utility function of an investor is given as U = E(r) - 0.5 A sigma^2, where the variable (A) represents the investors aversion to risk. Then as the variable (A) gets higher one gets less risk averse. (false as (A) gets higher = > risk averse |
| An example of a derivative security is | a commodity futures contract and a call option on mobil stock |
| Financial intermediaries exist because small investors cannot efficiently ____________. | diversify their portfolios, gather info, monitor their portfolios, advertise for needed investments |
| the sale of a mortgage portfolio through setting up mortgage pass-through securities is an example of _________________. | securitization |
| which of the following is not a nomey market instrument? t-bill, t-bond, cd, eurodollar account, or commercial paper | t-bond |
| firms which specialize in helping firms raise capital by selling securities are called ______. | investment banks |
| T-bills are financial instruments initially sold by __________ to raise funds. | US Treasury |
| The aske price of a T-bill in the secondary market is ________________. | the price at which the dealer in T-bills is willing to sell the bill |
| commercial paper is a short term security issued by _____________ to raise funds | large established firms |
| the interest rate charged by banks with excess reserves at a federal reserve bank to banks needing overnight loans to meet reserve requirement is called ____________. | The federal funds rate |
| a put option in which the stock price is $60 and the exercise price is $55 is daid to be | out of the money |
| which of following are long term options, bond options, flex options, LEAPS, or currency options | LEAPS |
| Which is true about the DJIA? value-wt avg of 30 stocks, price wt of avg 30 stocks, the divisor must be adjusted for stock splits | It is price weighted avg of 30 large stocks and the divisor must be adjusted for stock splits |
| which oneof the following indexes is regarded as the index of small stocks, s&p 500, russell 1000, NYSE composite, or russell 2000 | russell 2000 |
| in a _________ underwriteing arrangement, the investment bankers purchase the securiteis from the issuing company and then resell them to the public. | firm commitment |
| The _______ is where securities are tradede between current and potential owners. | secondary market |
| _______ was introduce by the SEC in part to stimulate capital raising in the US by non-US issuers. It allows issuers to sell securities to qualified institutional investors without disclosing the standard detaisl about their financial condition. | Rule 144a |
| What is true regarding specialists | maintain a book listing outstanding unexecuted limjit orders, earn income on commissions and spreads in stock prices, stand ready to trade at quoted bid and ask prices. |
| _______ are simple buy and sell orders thaqt are to be executed at current prices. | market orders |
| _______ started as the computer-linked price quotation system for the OTC. It was then evolved into a trading system and was granted approv. from the SEC to become a stock exchange in 2006. | NASDAQ |
| which of he following is not a role played by the specialists of the NYSE? Mng auction process, execute orders for floor brokers, serve as catalysts, stabalize prices | they do not execute orders for floor brokers. |
| the slope of the Capital Allocation Line (CAL) in the mean-variance analysis is called _______ . | sharpe ratio |
| an investor who wished to form a portfolio that lies to the left of the optimal risky portfolio on the CAL has to what? | lend some of their money at the risk free rate and invest the rest in the optimal risky portfolio. |
| binomial model | an option valuation model predicated on the assumption that stock prices can move to only two values over any short time period. |
| t or f if you plot portfolios creeated by combining a risky asset and the risk free asset on the mean-standard deviation plane, these portfolios would lie on a bullet shape curve | false |
| t or f the slope of the capital market line is the equilibrium price of risk in terms of expected return. | true |
| t or f | a stocks total risk consists of company-specific risk, which can be eliminated by diversification, plus market risk, which cannot be eliminated by diversification (true) |
| t or f | the fwo fund separation in the CAPM equilibrium means that every investor holds a combination of a well-diversified market portfolio and the risk free asset. (true) |
| t or f SML (security market line) is a graphical presentation of the relationship between expected return and beta. | true |
| t or f stocks with a beta of zero offer and expected rate of return lower than zero. | false |
| t or f | if other things remain the same the higher the standard deviation, the higher the beta of the security. (true) |
| t or f | the beta of a security is estimated as the slope of the regression equation, where the ependent variable (vertical asis) is he (excess) return on the market and the independent variable (horizontal axis) is the excess return on the security. (false) |
| t or f | if a security is below the SML, a mean variance investor would buy the security because it is undervalued. (false) |
| t or f in efficient capital markets, security prices change in a random fashion | true |
| t or f in efficient cap markets, correlation coefficient between stock returns for two non overlapping time periods should be around zero. | true |
| t or f | the weak form of the efficient market hypothesis contends that t=stock prices fully reflect all public and private information. (false) |
| t or f | researchers have found negative short-term serial correlation and positive long-term serial correlation in stock returns. (false) |
| t or f | in an event study the behavior of the cumulative average residual return (CAR) is studied to assess the impact of a particular event on a firms stock price. (true) |
| t or f in an efficient market, negative alphas on stocks will not quickly disappear. | false |
| t or f it has been known that a high P/E ratio portfolio on average outperforms a low P/E ration portfolio. | false |
| t or f | the size effect is an anomaly in which the small firms consistently experienced significantly larger risk-adjusted returns than the large firms in non-January months only. (false) |
| t or f | two of the possible explanations of the January effect are tax-loss selling hypothesis, and year-end window dressing hypothesis (true) |
| T OR F | the January effect is a phenomenon found only in US stock market. (false) |
| t or f | it was observed in the market that the Jan effect is > for the companies with biggest price drop in previous years. (TRUE) |
| t or f | they have observed on average, the highest returns on Friday and the lowest return on Monday. (true) |
| t or f | consider a 10-yr bond with a 10% coupon that has a present yield to maturity of 8%. If the market interest rates remain the same one year from now the price of the bond will be higher. (false) |
| t or f | in the constant growth rate model of common stock valuation, where the plowback ratio and the return on equity are assumed to be constant, PVGO is positive as long as the cost of capital (k) is greater than ROE. (false) |
| t or f | according to Dow theory, a rise in DJIA must be confirmed by the DJTA in order for the rise in the market to be sustainable. This theory is based on the simple relationship that exists between industrial that make products & trans that ship prod (true) |
| implied volatility | the standard deviation of stock returns that is consistent with an option's value. |
| t or f the standard deviation of a stock return is directly observable | false, it must be estimated from hx data, from scenario analysis, or from the prices of other options |
| investor fear gauge | implied volatility correlates with crisis |
| t or f Black Scholes is formula is derived assuming that stock volatility is constant. | true |
| ARCH | techniques to predict changes in volatility. |
| t or f once you know the value of a call, put pricing is easy | true |
| put call parity relationship | an equation representing the proper relationship between put and call prices. C - P = So - Xe^rt THIS APPLIES ONLY TO OPTIONS ON STOCKS THAT PAY NO DIVIDENDS. |
| t or f the long call - the short put position replicates the levered equity position. | true |
| the slope of the capital allocation line (CAL) is the mean-variance analysis is called _______ . | Sharpe Ratio |
| if other things remain the same diversification is more effective when | securities returns are negatively coorelated |
| the measure of how much the returns of two risky assets move together is | covariance |
| the optimal risky portfolio can be identified by finding _______. | the tangency point of the capital market line and the efficient frontier. |
| as diversification increases, the total variance of a portfolio approaches _______. | its systematic risk |
| CAPM asserts that portfolio returns are best explained by | systematic risk |
| a random walk occurs when _______. | future price changes are not correlated with past stock price changes. |
| Proponents of the EMH typically advocate ______. | a passive investment strategy |
| market researchers found that certain types of company's stocks yield abnormal returns. which of these is not abnorm? neglected, small, low MV/BV ratio, low P/E ratio, or non Jan fiscal yrs | firms with non-January fiscal years |
| market researchers found that stocks yield abnormal returns during certain periods which one is not one of this periods? turn of mo, turn of yr, fridays, first and last 30 mi of day, all are abnormal | all are abnormal |
| which one of the following is regarded as a bearish signal? price<moving avg, trin stat >1, the put/call ratio > average, ratio of odd-lot sales is > 1 | all are signals |
| t or f | call option position is more sensitive to swings in the stock price than the all-stock option (true) |
| Option's Hedge ratio | the change in the price of an option for a $1 increase in the stock price (a call option has a positive ratio and a put has a negative) |
| delta | the hedge ratio is commonly called the option's delta |
| t or f the call option hedge ratio must be positive and less than 1.0, while the put option hedge ratio is negative and of smaller value than 1.0 | true |
| option elasticity | the ratio the percent change in option price per percent changes in stock price. |
| portfolio insurance | portfolio strategies that limit investment losses while maintaining upside potential |
| T OR F LEAPS trade on the Chicago Board Options Exchange | true |
| dynamic hedging or delta hedging | constant updating of hedge positions as market conditions change. Delta is used to determine the number of share that need to be bought or sold. |
| t or f dynamic hedging is one reason portfolio insurance has been said to contribute to market volatility | true, market declines trigger additional sales of stock as portfolio insurers strive to increase their hedgings. |
| t or f the Black Scholes formula seems to perform worst for options on stock with high dividend payouts. | true. |
| t or f the difference between a option and future contract is that a future contract obligates you to buy or sell | true |
| futures contract | commitment today to transact in the future. |
| how old are futures agreements? | they go back at least to ancient Greece. |
| where are the original roots for the futures market? | agricultural products and commodities, the markets today are dominated by trading in financial futures such as stock indices, interest-rate dependent securities such as government bonds and foreign exchange. |
| forward contract | an arrangement calling for future delivery of an asset at an agreed-upon price. It protects each party from future price fluctuations. |
| t or f futures contracts differ fromforward contracts in that they call fro a daily settling up of any gains or losses on the contract. | True, in the case of a forward contract, no money changes hands until the delivery date. |
| margin | good faith deposit posted by investors in order to guarantee contract performance |
| futures price | the agreed upon price to be paid on a futures contract at maturity. |
| t or f Although the futures contract technically calls for delivery of an asset, delivery rarely occurs. | true, Instead, parties to the contract much more commonly close out their positions before contract maturity, taking gains or losses in cash. |
| long position | the futures trader who commits to purchasing the asset. (purchaser) |
| short position | the futures trader who commits to delivering the asset. (seller) |
| does any money change hands when you enter into a futures contract? | at the time of entrance, no money changes hands. |
| when does the trader holding the long position or the position of the purchaser, profit? | When the price increases. |
| spot price | is the actual market price of a commodity at the time of delivery. |
| t or f | unlike the payoff of a call option, the payoff of the long futures position can be negative. Because there is an obligation the investor cannot simply walk away. |
| what are the 4 broad categories that futures and forwards contracts are traded in? | agricultural commodities, metal and minerals (including energy commodities), foreign currencies, and financial futures (fixed income securities and stock market indexes) |
| single stock futures | a futures contract on the share of an individual company |
| OneChicago | a joint venture of the Chicago Board Options Exchange, Chicago Mercantile Exchange, and Chicago Board of Trade has operated and entirely electronic market in single stock futures since 2002. |
| who makes the arrangements for forwards? Is there a formal organization like the OCC is for options? | No formal exchange rather banks and brokers simply negotiate contracts fro clients and themselves as needed. |
| what is the world's largest options and futures exchange? | Eurex, which is jointly owned by the Deutsche Borse and Swiss exhange. It it a full electronic trading and clearing platform and in 2004 began to list contracts in the US. |
| Globex | The Chicago Mercantile Exchanges' electronic system. |
| t or f electronic trading will inevitably displace floor trading | true |
| CME Globex | Chicago Board of Trade CBOT and and Chicago Mercantile exchange combined to make one large electronic trading center. Together they will be the world's largest derivative exchange as well as a very strong competitor in the over the counter derivative mkt |
| Clearing houses make it possible for traders to liquidate positions easily. t or f | true |
| reversing trade | if you are currently long in a contract and want to undo your position, you simply instruct your broker to enter a short side of a contract to close out of your position. |
| open interest on a futures contract | the number of contracts outstanding. Long and short are not counted separately, it is all the same. |
| t or f when futures contracts begin trading, open interest (the number of contracts outstanding) is zero. | true, as time passes, open interest increases as progressively more contracts are entered. |
| marketing to market | the daily settlement of obligations on futures positions. |
| t or f the initial margin is usuaqlly set between 5 - 15% of the total value of the contract. Contracts written on assets with more volatile prices require higher margins | true |
| t or f instead of waiting until the maturity date, the clearinghouse for futures requires all positions to recognizze profits as they acrue daily. These profits and lossed are added or deducted from the marging acct daily | true |
| how do forward and future contracts differ? | future contracts pay as you go, daily, and forward contracts are held until maturity and no funds are transferred until that date, although the contraqcts maqyt be traded. |
| maintenance margin | an extablished value below which a trader's margin may not fall. Reaching the maintenance margin triggers a margin call. |
| convergence property | the futures price and the spot price must converge at maturity |
| cash settlements | the cash value of the underlying asset (rather than the asset itself (corn, wheat)), is delivered to satisfy the futures contract. |
| CFTC | Commodity Futures Trading Commission regulates Futures markets. sets capital requirements for mbr firms of the futures exchanges, authorizes trading in new contracts, and oversees maint of daily trading records |
| cross hedging | hedging a position using futures on another asset |
| basis | the difference between the futures price and the spot price |
| basis risk | risk attributable to uncertain movements in the spread between a futures price and a spot price |
| futures spread | taking a long position in a futures contact of one maturity and a short position in a contract of a different maturity, both on the same commodity. |
| risk free | t-bills |
| spot-futures parity theorem, or cost of carry relationship | describes the theoretically correct relationship between spot and futures prices. violation of the parity relationship gives rise to arbitrage opportunities. |
| index arbitrage | strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a riskless profit. |
| program trading | coordinated buy orders and sell orders of entire portfolios, usually with the aid of computers, often to achieve index arbitrage objectives. |
| price value of basis | the change in the value of an asset due to a 1 basis point change in its yield to maturity |
| foreign exchange swap | an agreement to exchange a sequence of payments denominated in one currency for payments in another currency at an exchange rate agreed today |
| interest rate swaps | contracts between two parties to trade cash flows corresponding to different interest rates. |
| notional principal | principal amount used to calculate swap payments. |
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