Derivatives - Derivatives Section 1

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17. Which of the following statements about options is most accurate?

  • Option : A
  • Explanation : An option is strictly the right to buy (a call) or the right to sell (a put). It does not provide both choices. Similarly, the right to convert is an obligation, not a right.
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18. Which of the following is a characteristic of a put option on the stock?

  • Option : B
  • Explanation : A put option on a stock provides no guarantee of any change in the stock price. It has an expiration date, and it provides for a fixed price at which the holder can exercise the option, thereby selling the stock.
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19. Analyst 1: A credit derivative is a derivative contract in which the seller provides protection to the buyer against the credit risk of a third party.
Analyst 2: A credit derivative is a derivative contract in which the exchange provides a credit guarantee to both the buyer and the seller.
Which analyst’s statement is most likely correct?

  • Option : A
  • Explanation : A credit derivative is a class of derivative contracts between two parties, a credit protection buyer and a credit protection seller, in which the latter provides protection to the former against a specific credit loss.
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