Unit 16

Question 1

Derivative Securities - Examples

Voting Rights?

Answer 1

Options, Rights, Warrants, Commodities such as wheat, stock- anything that derives it’s value from something else. Forwards and Futures (derive value from an asset that is not a security - typically a commodity)

• Do not have voting rights
• REITS are not Derivatives. You actually own the real estate with these.

Question 2

Standardized Items in Options (3)

Answer 2

• The underlying asset
• The expiration date
• The exercise or strike price

Question 3

2 Most Important Factors influencing price of derivatives

Answer 3

• Price movement of underlying asset

- Time to expiration (time value)

Question 4

*American Style vs. European Style Exercising Options Dates

Answer 4

American Style: (A) Anytime
European Style: (E) Can only exercise at expiration.
(Note for test purposes, european style can be exercised the day before expiration and/or up to expiration)

Question 5

*Options are Derivative Securities - Regardless of their length

Answer 5

-

Question 6

*Key Items to Remember About Rights

Answer 6

• Preemptive Rights
• They are given, not sold
• Exercisable at a price below the market value
• Have a short life-span - usually 45-60 days
• They can be sold, and then the buyer can exercise them.
• They can be left to expire

Question 7

*Key Items to Remember About Warrants

Answer 7

• Have an exercise price above the current market price
• Longer expiration period
• Most investors view these as call options with a very long expiration
• No voting rights (same as every other derivative)

Question 8

Rights and Warrants originate with the issuer

Answer 8

Options originate on the exchange

Question 9

Futures and Forwards

Answer 9

• Not securities. Futures regulated by CFTC (Commodities Futures Trading Commission). Forwards are not regulated.
• Futures are commonly used by speculators and on exchanges.
• Forwards are used by producers (farmers) and a personal contract between 2 people.