ch_14 - Chapter 14 Options Markets Questions 1. Describe...

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Chapter 14 Options Markets Questions 1. 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. How are call options used by speculators? Describe the conditions in which their strategy would backfire. 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. 3. How are put options used by speculators? Describe the conditions in which their strategy would backfire. 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. 4. What is the maximum loss that could occur for a purchaser of a call option? ANSWER: The maximum loss to a purchaser of a call option is the premium paid for the call
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This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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ch_14 - Chapter 14 Options Markets Questions 1. Describe...

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