1. stock index futures enable investors to participate in the general movements
ID: 2790668 • Letter: 1
Question
1. stock index futures enable investors to participate in the general movements of the stock market as a whole, and are suitable for only speculating. true or false
2. With regard to future options, in which scenario would we choose to take a short position:
A) when we expect rates to decrease dramatically.
B) when we expect rates to remain the same.
C) when the market for the future option is thin.
D) when we expected rates to increase dramatically.
3. What is the driving variable for MPT?
4.Call or put options. How do you provide a certain position (long/short)
5. What are corporate and treasury bonds evidence of?
6. What are the payments that come with a corporate bond?
7. How are corporate and treasury bonds issued?
Explanation / Answer
1. It is True that Stock index futures are a reflection of general movements of stock market as a whole, because stock index is calculated based on the weight of a selected number of shares, which are a reflection of the stock market movements.
Stock Index futures are used for speculations by the speculators, however it can also be used by hedgers for hedging purpose.
2. Short position in a derivative market means selling the futures now, so that in a future date or expiry the future may be bought back at a lower prices and adjusted to the short position. Hence Option (A) best matches the answer. When we expect the rates to go down dramatically, we sell today at a higher price, and expect it to fall in prices, so that when the price comes down, it is bought back at lower prices and adjusted with the short position.
3. Modern Portfolio Theory or (MPT) is basically a theory, by which we try to maximise our return by including the stocks which can increase the overall return of the portfolio. Also by including more stocks in a portfolio, we diversify away our risks.
4. Call and Put Options: Let us first understand what is a call and what is a put.
Call is an option to buy stocks at a future date by paying a premium now. When an investor is bullish on a stock, he buys a call option. There is no obligation to exercise the option.
Put Option is bought when the investor expects the stock prices to go down. When the investor is bearish in the market.
Long position on a call: Buy Buying a call option, the investor is long in call option and is also long on underlying stock.
Long position on a put : Buy purchasing a put option, the investor is long in put option, but is short in the underlying security.
Short position on a call: Buy Selling a call option, the investor is bearish about the security. He is short on both his call option as well as short in the underlying security.
Short Position on a put option: When the investor is bullish on the stock, and it wants to capture time value of money. It goes short in a put option.
Buy being short in a put option, the investor is short on put option, but is long in the underlying security.
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