Sample Questions and Answers
What is the “strike price” of an option?
The price at which the option holder can buy or sell the underlying asset
B. The price at which the option is traded
C. The market price of the underlying asset when the option expires
D. The amount of time until the option expires
Answer: A
The “Vega” of an option is a measure of:
The rate of change in an option’s price with respect to changes in the price of the underlying asset
B. The rate of change in an option’s price with respect to changes in interest rates
C. The sensitivity of an option’s price to changes in volatility
D. The time decay of an option
Answer: C
What is the primary risk in a “naked call” option strategy?
The risk that the price of the underlying asset will decline
B. The risk that the price of the underlying asset will rise above the strike price
C. The risk that the option holder will exercise the option at a loss
D. The risk of unlimited loss if the price of the underlying asset rises significantly
Answer: D
What does a “reverse conversion” strategy involve?
Buying a call option and selling a put option with the same strike price
B. Selling a call option and buying a put option with the same strike price
C. Creating a synthetic short position by combining options and futures
D. Creating a synthetic long position by combining options and futures
Answer: B
A “zero-coupon bond” is a bond that:
Pays interest periodically
B. Pays no interest and is sold at a discount to its face value
C. Pays interest in the form of dividends
D. Can be converted into equity shares
Answer: B
The “rollover” process in futures trading involves:
Selling an expiring contract and buying a new contract with a longer expiration
B. Selling an option before its expiration date
C. The automatic renewal of options contracts
D. Moving from one asset class to another
Answer: A
In the context of options, “intrinsic value” refers to:
The time value of an option
B. The difference between the option’s strike price and the underlying asset’s price when it is profitable to exercise
C. The price of the underlying asset when the option expires
D. The premium paid for an option
Answer: B
What is a “long strangle” strategy?
Buying a call and a put option with different strike prices and the same expiration date
B. Selling a call and a put option with the same strike price
C. Buying a call and a put option with the same strike price
D. Selling a call and a put option with different strike prices
Answer: A
What is “duration” in the context of interest rate derivatives?
The time until the underlying asset matures
B. A measure of the sensitivity of a bond’s price to changes in interest rates
C. The time remaining until a futures contract expires
D. A measure of the volatility of interest rates
Answer: B
What does “gamma” measure in options pricing?
The rate of change of an option’s price in relation to changes in volatility
B. The rate of change of delta in relation to changes in the price of the underlying asset
C. The time decay of an option’s price
D. The probability of an option expiring in the money
Answer: B
In a “collar” strategy, the investor is:
Selling a call and buying a put option to hedge a position
B. Selling both a call and a put option to generate income
C. Buying a call and a put option with the same expiration date
D. Holding an underlying asset while simultaneously buying a call option and selling a put option to protect against losses
Answer: D
What is the “fair value” of a derivative contract?
The current market price of the underlying asset
B. The value derived from the contract’s current price and future expected cash flows
C. The price at which the derivative contract can be immediately sold on the market
D. The price at which the derivative contract was initially purchased
Answer: B
What is a “capped call option”?
An option with a fixed limit on the potential profit
B. An option that expires after a predetermined time period
C. A call option that has a minimum price at which it can be exercised
D. An option that has a fixed interest rate for the underlying asset
Answer: A
A “short put” option strategy benefits if:
The price of the underlying asset increases
B. The price of the underlying asset decreases
C. The price of the underlying asset remains the same
D. The price of the underlying asset fluctuates dramatically
Answer: A
A “futures contract” typically includes which of the following?
An agreement to settle in cash rather than physical delivery of the asset
B. A specific expiration date for the contract
C. An option to buy or sell at a specified price
D. A loan agreement between the buyer and the seller
Answer: B
Which of the following is the primary use of “interest rate futures”?
To hedge against commodity price fluctuations
B. To hedge against changes in interest rates
C. To speculate on the future direction of stock prices
D. To protect against currency exchange rate changes
Answer: B
The term “underlying asset” refers to:
The asset that the derivative contract is based on
B. The price at which a derivative contract can be exercised
C. The exchange where the derivative contract is traded
D. The market value of the asset
Answer: A
What is the primary risk associated with a “naked” option?
The risk of unlimited loss
B. The risk of limited profit
C. The risk of high premiums
D. The risk of the option expiring worthless
Answer: A
A “bull call spread” strategy involves:
Buying a call option and selling a call option with the same expiration date but different strike prices
B. Buying a call option and buying a put option with the same strike price
C. Selling a call option and selling a put option with the same strike price
D. Buying a call option and buying a call option with the same strike price
Answer: A
What does “delta” measure in options trading?
The change in an option’s price relative to the change in the volatility of the underlying asset
B. The rate of change in an option’s price in relation to the price movement of the underlying asset
C. The time decay of an option’s value
D. The interest rate sensitivity of an option
Answer: B
What is the purpose of “interest rate swaps”?
To exchange one type of interest rate for another, usually fixed for floating or vice versa
B. To swap one underlying asset for another
C. To trade interest rate derivatives on the open market
D. To hedge against equity price volatility
Answer: A
In which situation would a “protective put” strategy be most useful?
When an investor expects the price of the underlying asset to decrease significantly
B. When an investor expects the price of the underlying asset to increase moderately
C. When an investor wants to lock in profits from an asset
D. When an investor wants to hedge against volatility but not price movement
Answer: A
Which of the following best describes a “synthetic” position in options?
A position that is artificially created using other derivative contracts, such as combining options with futures contracts
B. A position that mimics a long position in the underlying asset
C. A position that allows for immediate settlement of options
D. A position that involves creating an option contract with no underlying asset
Answer: A
What is the difference between “call options” and “put options”?
A call option gives the holder the right to sell, while a put option gives the holder the right to buy
B. A call option gives the holder the right to buy, while a put option gives the holder the right to sell
C. A call option is for long-term investments, while a put option is for short-term investments
D. Call options are only used in commodities markets, while put options are used in financial markets
Answer: B
What is “implied volatility” used for in options pricing?
To estimate the future volatility of the underlying asset
B. To adjust the strike price of an option
C. To calculate the option’s time value
D. To determine the optimal expiration date for an option
Answer: A
What is a “futures contract” designed to do?
Allow the buyer to pay for an asset at a discounted price in the future
B. Allow the seller to cancel the contract at any time
C. Commit the buyer and seller to buy or sell an asset at a predetermined price on a future date
D. Provide a mechanism for price discovery in the open market
Answer: C
A “horizontal” or “time” spread in options involves:
Buying and selling options with different strike prices but the same expiration date
B. Buying and selling options with the same strike price but different expiration dates
C. Buying a long-term call and a short-term put
D. Selling options with the same strike price and expiration but different underlying assets
Answer: B
The “greeks” in options trading are used to measure:
The price of the underlying asset
B. The time decay of an option
C. The sensitivity of an option’s price to various factors like volatility, interest rates, and time decay
D. The volatility of the underlying asset
Answer: C
Which of the following strategies involves buying both a put option and a call option with the same strike price and expiration date?
Iron condor
B. Long straddle
C. Covered call
D. Protective put
Answer: B
In a “covered call” strategy, the investor:
Sells a call option while simultaneously holding the underlying asset
B. Buys a put option while simultaneously holding the underlying asset
C. Sells a call option without holding the underlying asset
D. Buys a call option while simultaneously selling the underlying asset
Answer: A
What is the key feature of “currency options”?
They give the holder the right to exchange one currency for another at a fixed exchange rate
B. They guarantee future exchange rates between currencies
C. They eliminate currency risk completely
D. They are used only by central banks to manage monetary policy
Answer: A
What is a “collar” in options trading?
A strategy that involves buying a call option and selling a put option with the same strike price
B. A strategy used to limit both downside risk and upside potential by using options
C. A strategy used to speculate on large movements in the underlying asset
D. A type of option used to protect against interest rate changes
Answer: B
“Theta” in options trading refers to:
The time decay of an option’s price
B. The price of the underlying asset
C. The change in an option’s price due to volatility
D. The interest rate sensitivity of an option
Answer: A
What is the primary advantage of using “futures contracts” for hedging?
They allow for customized agreements
B. They provide a mechanism for speculating on market movements
C. They are standardized and traded on exchanges, reducing counterparty risk
D. They offer immediate settlement and delivery of assets
Answer: C
In a “reverse iron condor” strategy, the investor:
Buys both a call and a put option with the same strike price and sells another call and put option with different strike prices
B. Sells both a call and a put option with the same strike price and buys another call and put option with different strike prices
C. Sells both a call and a put option with different strike prices
D. Buys a call option and sells a call option with different expiration dates
Answer: B
In a “straddle” strategy, the investor:
Buys a call and a put option with the same strike price and expiration date
B. Sells a call and a put option with different strike prices
C. Buys both a call and a put option with different expiration dates
D. Sells both a call and a put option with the same strike price and expiration date
Answer: A
What does “backwardation” in futures markets indicate?
The futures price is lower than the spot price of the underlying asset
B. The futures price is higher than the spot price of the underlying asset
C. There is no difference between the spot and futures prices
D. The futures market is in long-term equilibrium
Answer: A
A “binary option” pays:
A set amount if the option expires in-the-money
B. The value of the underlying asset at expiration
C. A variable payout depending on the strike price
D. A fixed payout only if the price of the underlying asset reaches a specific threshold
Answer: A
What is a “knock-in” option?
An option that becomes active only if the underlying asset reaches a specific price
B. An option that has an automatic exercise feature when the price of the underlying asset is reached
C. An option with no strike price
D. An option that pays out automatically at expiration
Answer: A
A “floor” strategy in options involves:
Selling a call option to reduce downside risk
B. Buying a put option to protect against falling prices
C. Selling a put option to reduce upside potential
D. Buying a call option to protect against falling prices
Answer: B
What is the advantage of using “options” instead of “futures” for hedging?
Options offer unlimited risk potential
B. Futures require no upfront premium payments
C. Options provide flexibility and limit downside risk to the premium paid
D. Futures contracts are more liquid than options
Answer: C
Which of the following best describes “exchange-traded derivatives”?
Derivatives that are negotiated and traded directly between two parties
B. Derivatives that are standardized and traded on an organized exchange
C. Derivatives with a fixed interest rate
D. Derivatives that are not subject to regulation
Answer: B
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