Equity Investments - Equity Investments Section 1

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16. Which of the following is least likely an objective of market regulation?

  • Option : C
  • Explanation : Ensuring that investors earn at least the risk free rate is least likely to be an objective of market regulation
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18. Mr. Ahmed writes a put option on the S&P 500 Index futures. Which of the following best describes his position with respect to the put contract and his exposure in the underlying index future respectively?

  • Option : C
  • Explanation : Since Mr. Ahmed has written a put contract, he is short the option and has an obligation to purchase the asset if exercised by the put owner. He also has a long exposure to the risk of the underlying index future because he benefits when its quoted price increases—that is, when the put declines in value (or suffers a loss when its quoted price decreases as the put increases in value).
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19. Mike buys a stock at $50 and wants to limit downside risk. Which of the following orders will most likely guarantee that he can sell the stock at $40? (GTC means good till cancelled)

  • Option : A
  • Explanation : Option contracts are executed at the strike price and can therefore be viewed as limit orders. In this case, a put buy order at a strike price of $40 will guarantee selling the stock at $40.
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