SCA Financial Instruments 2

Question 1

What is a futures contract?

Accepted Answer

A legally binding agreement to buy or sell a specific asset at a predetermined price on a specific future date

Answer

A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an asset at a predetermined price on a specific future date. Both parties are obligated to fulfill the contract.

Question 2

What distinguishes an option from a futures contract?

Accepted Answer

An option gives the buyer the right, but not the obligation, to buy or sell; a futures contract obligates both parties

Answer

An option gives the buyer the right (but not the obligation) to buy (call) or sell (put) an asset at a specified price before expiry. A futures contract obligates both the buyer and seller to transact at the agreed price.

Question 3

What is a 'call option'?

Accepted Answer

An option to buy an asset at a specified price (strike price) before expiration

Answer

A call option gives the holder the right to buy an underlying asset at the strike (exercise) price before or on the expiration date. Buyers profit when the asset price rises above the strike price.

Question 4

What is a 'put option'?

Accepted Answer

An option to sell an asset at a specified price (strike price) before expiration

Answer

A put option gives the holder the right to sell an underlying asset at the strike price before or on the expiration date. Buyers profit when the asset price falls below the strike price.

Question 5

What is a mutual fund?

Accepted Answer

A pooled investment vehicle that collects money from many investors and invests in a diversified portfolio of securities

Answer

A mutual fund pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers make investment decisions, and returns/losses are shared among investors.

SCA Practice Test

SCA Practice Test

SCA Financial Instruments 2