Stock Institutions and Financial Markets Test 1

Question 1

The various types of markets where derivatives are traded include

Accepted Answer

Derivative securities markets

Answer

Derivative securities markets are specialized financial markets where derivative contracts, such as futures, options, and swaps, are traded. These markets are distinct from cash markets, where the underlying assets themselves are bought and sold. Derivatives derive their value from an underlying asset, index, or rate.

Question 2

When purchasing a put option, the likelihood that the buyer will experience a loss rises as

Accepted Answer

A rise in the stock price

Answer

When purchasing a put option, the buyer profits if the underlying stock price falls below the strike price. Therefore, if the stock price rises, the put option becomes less valuable, potentially expiring worthless. A continuous rise in the stock price directly increases the likelihood that the put option buyer will experience a loss.

Question 3

To determine ____, the cost of an option is deducted from its time value.

Accepted Answer

Intrinsic value

Answer

An option's total premium (cost) is composed of two main parts: its intrinsic value and its time value (also known as extrinsic value). The intrinsic value represents the immediate profit if the option were exercised. Therefore, if you subtract the time value from the total option cost, the remaining amount is the intrinsic value of the option.

Question 4

The kind of swaps in which two counterparties trade fixed interest payments for floating payments

Accepted Answer

Interest rate swaps

Answer

Interest rate swaps are financial contracts where two parties agree to exchange future interest payments. Specifically, one counterparty typically pays a fixed interest rate while receiving a floating interest rate payment from the other. This mechanism allows companies to manage their exposure to interest rate fluctuations or to convert existing debt from fixed to floating rates, or vice versa.

Question 5

When a significant amount of the proceeds are borrowed from the investor's broker, the situation is referred as as

Accepted Answer

Leverage investment

Answer

Leverage investment refers to the strategy of using borrowed capital to increase the potential return of an investment. When an investor borrows a significant portion of the funds from their broker to make an investment, they are employing leverage. While leverage can amplify gains, it also significantly increases the risk of losses, as the investor is still responsible for repaying the borrowed amount plus interest.

Stock Jobs Practice Test

Stock Jobs Practice Test

Stock Institutions and Financial Markets Test 1