Differentiate Derivative Securities - Series 65

1. What is the standard equity option contract size for U.S. listed options?

   Typically $100$ shares per contract.

2. What is a warrant, and who issues it compared with exchange-listed options?

   A company-issued security giving the right to buy issuer stock at a set price.

3. What is the main economic cost mechanism for futures (besides commissions)?

   Margin requirements and daily mark-to-market cash flows.

4. What is the maximum loss for a short (written) uncovered call option?

   Unlimited.

5. Which derivative most directly exposes a trader to potentially large losses from small price moves due to leverage?

   Futures (high leverage with margin and daily mark-to-market).

6. What does mark-to-market mean for futures positions?

   Daily gains/losses are settled in cash to the margin account.

7. What is the maximum gain for a short (written) call option?

   The premium received.

8. What is the maximum loss for a short (written) put option (cash-secured conceptually)?

   Substantial but limited: strike price minus premium (if underlying goes to $0$).

9. What is the maximum loss for a long (purchased) call option?

   The premium paid.

10. What is a futures contract in terms of rights and obligations for both parties?

    Both parties are obligated to buy/sell the underlying at the contract price.

11. Which risk is most associated with buying options compared with buying the underlying asset?

    Time decay risk (option value can decline as expiration approaches).

12. What is the key cost component paid by an option buyer at trade initiation?

    The option premium.

13. What is intrinsic value for a call option stated as a formula in terms of $S$ and $K$?

    Call intrinsic value $=\max(0, S-K)$.

14. What is intrinsic value for a put option stated as a formula in terms of $S$ and $K$?

    Put intrinsic value $=\max(0, K-S)$.

15. Which contract feature most directly creates leverage: paying premium or posting margin?

    Posting margin (futures) and paying a small premium (options) both create leverage.

16. What is the maximum gain for a long call option?

    Unlimited.

17. What is the maximum gain for a long put option (ignoring transaction costs)?

    Approximately the strike price minus premium (limited).

18. Which has greater counterparty default protection: exchange-traded options or OTC contracts?

    Exchange-traded options (clearinghouse guarantees performance).

19. What is an option contract in terms of rights and obligations for buyer and writer?

    Buyer has a right; writer has an obligation to buy or sell at strike price.

20. What is the maximum loss for a long (purchased) put option?

    The premium paid.

21. What is the primary credit risk difference between listed options and warrants?

    Warrants have issuer credit risk; listed options are cleared by a clearinghouse.

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