Chapter 14 Options Markets

Chapter 14 Options Markets - Chapter 14 Questions 1....

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Chapter 14 Questions 1. Options Versus Futures. Describe the general differences between a call option and a futures contract. ANSWER: A call option requires a premium above and beyond the price to be paid for the financial instrument, whereas a financial futures contract does not contain such a premium. In addition, the call option represents a right but not an obligation, whereas a futures contract represents an obligation. 2. Speculating With Call Options. How are call options used by speculators? Describe the conditions in which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?
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ANSWER: Call options are purchased by speculators when the price of the underlying stock is expected to increase in the near future. If the stock price declines, the strategy of purchasing a call option can backfire. Call options are sold by speculators when the price of the underlying stock is expected to decrease in the near future. If the stock price increases, the strategy of selling a call option would backfire. The maximum loss to a purchaser of a call option is the premium paid for the call option. 3. Speculating With Put Options. How are put options used by speculators? Describe the conditions in which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option? ANSWER: Put options are purchased by speculators when the price of the underlying stock is expected to remain stable or decrease in the near future. If the stock price increases, the strategy of purchasing a put option would backfire. Put options are sold by speculators when the price of the underlying stock is expected to remain stable or increase in the near future. If the stock price decreases, the strategy of selling a put option can backfire. The maximum loss to a purchaser of a put option is the premium paid for the put option. 4. Selling Options. Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options? ANSWER: Speculators sell call options if they expect the price of the underlying stock to
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Chapter 14 Options Markets - Chapter 14 Questions 1....

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