Gypsy

Exchange-traded stock options are all of the following EXCEPT:

A) backed by the options clearinghouse.

B) typically for 100 shares of stock.

C) subject to counterparty risk.

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Exchange-traded options are backed by the clearinghouse and not subject to counterparty risk; over-the-counter options are subject to counterparty risk.

Gypsy

An option is settled in cash, with nothing delivered. The long payoff is the difference between the security value and the strike price, multiplied by a contract multiplier. The option is a(n):

A) commodity option.

B) index option.

C) futures option.

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Options on stock indexes are only settled in cash and require a multiplier to determine the payoff. Futures options give the holder the right to buy or sell a futures contract, but require no multiplier. Commodity options give the holder the right to buy or sell physical goods.

Gypsy

Which of the following statements regarding interest-rate options is least accurate?

A) They are based on a fixed income security.

B) Call option values move in the same direction as interest rates.

C) They are based on a specific interest rate rather than a bond.

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Treasury bond or bill options are options on fixed income securities. Interest rate options are based on a specific reference rate and interest rate calls have positive payoffs when the reference rate is above the rate specified in the contract.

Gypsy

An option to buy Mexican pesos is:

A) a currency option.

B) an exchange rate option.

C) a foreign option.

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Options on foreign currencies are called currency options and cover a specific number of foreign currency units.

Gypsy

Financial options include all of the following EXCEPT options on:

A) interest rates.

B) foreign currencies.

C) futures.

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Options on futures are considered a separate type of options.

Gypsy

A short position in a forward rate agreement is equivalent to:

A) writing an interest rate put and buying an interest rate call.

B) writing both an interest rate put and an interest rate call.

C) writing an interest rate call and buying an interest rate put.

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A short position in a forward rate agreement is an obligation to make a hypothetical loan at the contract rate and will be profitable when the forward rate falls. An equivalent position using interest rate options is to buy a put and write a call.

Gypsy

A long interest rate call and a short interest rate put is an equivalent position to:

A) a pay-fixed interest rate swap.

B) a long position in a forward rate agreement.

C) a short position in a forward rate agreement.

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A long call and short put on interest rates is equivalent to a long position in a forward rate agreement. Both gain when forward rates increase and decline in value when interest rates decrease.

Gypsy

Which combination of interest rate options most likely has the same pattern of payoffs as the short position in a forward rate agreement?

Interest rate call option

Interest rate put option

A) Short Long

B) Long Short

C) Long Long

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A short position in an FRA will have a positive payoff when the reference rate is less than the contract rate, and a negative payoff when the reference rate is greater than the contract rate, at expiration. A short interest rate call will have a negative payoff when the reference rate is greater than the strike rate, and a long put will have a positive payoff when the reference rate is less than the strike rate.

Gypsy

A forward rate agreement is equivalent to:

A) either an interest rate put or an interest rate call.

B) a swap.

C) a long interest rate call and a written interest rate put.

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A long forward rate agreement is equivalent to a call (profits when interest rates go up) and a written put (losses when interest rates go down).

Gypsy

An issuer of floating rate debt can create an interest rate collar by buying:

A) an interest rate floor and selling an interest rate cap.

B) an interest rate cap and selling an interest rate floor.

C) both an interest rate cap and an interest rate floor.

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An interest rate collar combines a long interest rate cap with a short interest rate floor. Selling the floor offsets some of the cost of buying the cap.