Options Trading

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Q.1 What is Bear Spread in a Futures and Options Trading Market?
In Futures and Options Trading Market, Bear Spread refers to selling the nearby contract month and buying the deferred contract to profit from a change in the price relationship.
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Q.2 Who is the 'Holder' in Futures and Options Trading Market?
In Futures and Options Trading Market, Holder refers to the party who purchased an option.
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Q.3 What is a 'Cash Contract' in a Futures And Options Trading Market?
In Futures and Options Trading Market, Cash Contract refers to the sales agreement for either immediate or future delivery of the actual product.
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Q.4 Describe the types of membership in Derivatives Market.
Various types of Membership in derivatives market are - 1. Trading Member (TM) - Member of the derivatives exchange and can trade on his own behalf and on behalf of his clients. 2. Clearing Member (CM) - Members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them. 3. Self-clearing Member (SCM) - Those clearing members who can clear and settle their own trades only.
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Q.5 What is Federal Fund in a Futures And Options Trading Market?
In Futures and Options Trading Market, Federal Fund refers to the fund that member bank deposits at the Federal Reserve; such that these funds are loaned by member banks to other member banks.
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Q.6 What is a derivative, and how does it differ from the underlying asset it's derived from?
A derivative is a financial contract that derives its value from an underlying asset, such as stocks, bonds, commodities, or currencies. Unlike the asset itself, derivatives don't have intrinsic value but instead rely on the fluctuations of the underlying asset.
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Q.7 Can you provide an example of how derivatives are used to manage risk in financial markets?
A farmer uses a futures contract to sell their upcoming crop at a fixed price. This protects them from price fluctuations. Similarly, a company might use interest rate swaps to convert a variable-rate loan into a fixed-rate one, reducing interest rate risk.
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Q.8 How do derivatives contribute to price discovery in financial markets?
Derivatives play a crucial role in price discovery by providing insights into market sentiment and expectations. For example, the prices of options and futures contracts can reflect investor opinions about the future movement of underlying assets.
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Q.9 What are some potential risks associated with trading derivatives, and how can investors manage these risks?
Derivative trading can involve substantial risks, such as market risk, liquidity risk, and counterparty risk. Investors can manage these risks by diversifying their portfolio, conducting thorough research, using risk management tools like stop-loss orders, and understanding the terms of the derivatives they're trading.
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Q.10 Explain how derivatives enable investors to gain exposure to underlying assets without directly owning them.
Derivatives allow investors to speculate on the price movements of underlying assets without owning them. For example, an investor can buy a call option on a stock, allowing them to benefit from potential price increases without actually purchasing the stock.
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Q.11 What role do market makers play in the derivatives market, and how do they contribute to market liquidity?
Market makers facilitate derivative trading, acting as intermediaries. They offer ongoing buy and sell prices for different derivatives, guaranteeing trade counterparts. This boosts market liquidity, aiding smooth entry and exit for investors.
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Q.12 Can you provide an example of a derivative used for speculation and another for risk management?
For speculation, consider an investor purchasing a gold futures contract, anticipating a price rise for profitable selling. As for risk management, envision a company using an interest rate swap to switch variable-rate loan payments to fixed, reducing exposure to interest rate changes.
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Q.13 How do over the counter (OTC) derivatives differ from exchange-traded derivatives, and what are the advantages and disadvantages of each?
OTC derivatives are personalized contracts between two parties, flexible in terms. Exchange-traded derivatives are standardized contracts on organized exchanges. OTC provides customization but can pose higher counterparty risk. Exchange-traded derivatives offer liquidity and transparency but lack customization.
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Q.14 In what ways can derivatives contribute to the creation of complex investment strategies?
Derivatives allow investors to combine different contracts and strategies to achieve specific goals. For instance, an investor might create a straddle by buying both a call and a put option with the same strike price and expiration, aiming to profit from significant price movement in either direction.
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Q.15 Discuss the key advantages of using derivatives for risk management in comparison to other traditional methods.
Derivatives offer risk management benefits like flexibility, customization, and cost efficiency. Unlike insurance, they adapt to precise risks and market situations. They hedge diverse risks—like interest rates and currency fluctuations—beyond prices. This flexibility and cost-effectiveness make derivatives a compelling risk management solution.
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Q.16 Explain the concept of a futures contract and how it's different from a forward contract.
A futures contract is a standardized agreement to buy or sell an underlying asset at a predetermined price on a specified future date. Unlike a forward contract, futures are traded on exchanges, are more standardized, and involve daily mark-to-market settlement.
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Q.17 How do speculators and hedgers differ in their use of futures contracts?
Speculators aim to profit from price movements by buying or selling futures contracts without the intention of owning the underlying asset. Hedgers, on the other hand, use futures to manage their exposure to price fluctuations, often related to their core business.
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Q.18 In futures and options trading market who is holder?
The party who purchased an option, is the holder in the Futures and Options Trading Market. When a futures position or a short options on futures Position is opened Initial Performance Bond The funds required. Sometimes referred to as Initial Margin.
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Q.19 What is the role of a clearinghouse in futures trading?
A clearinghouse acts as an intermediary between buyers and sellers in futures trading. It ensures the integrity of the market by guaranteeing the performance of contracts, collecting margins from participants, and facilitating the settlement process.
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Q.20 What is option premium in futures and options trading market?
It is the price of an option-the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.
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Q.21 How does leverage work in futures trading?
Futures contracts require a fraction of the contract's value as margin. This allows traders to control a larger position with a relatively smaller investment. While leverage magnifies gains, it also increases potential losses.
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Q.22 What are the differences between se01, se09 and se10?
To determine which particular cash debt instrument is most profitable to deliver against a futures contract, cheapest to Deliver in Futures and Options Trading Market is a method.
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Q.23 What are the potential advantages and disadvantages of using futures contracts?
The advantages of futures contracts include liquidity, transparency, and ease of trading. However, disadvantages include the obligation to fulfill the contract, margin requirements, and the potential for unlimited losses, especially when using leverage.
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Q.24 How many types of tables exist and what are they in data dictionary?
COM Membership in Futures and Options Trading Market is a Chicago Board of Trade membership that permits an individual to trade contracts listed in the commodity options market category.
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Q.25 How does the concept of mark-to-market valuation work in the context of futures contracts?
Mark-to-market valuation involves the daily re-evaluation of the value of futures contracts based on the current market price. Gains or losses are settled daily between the parties, ensuring transparency, and minimizing default risk.
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Q.26 What is cash contract in a futures and options trading market?
It is a sales agreement for either immediate or future delivery of the actual product.
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Q.27 Explain how futures contracts can be used to hedge against price fluctuations for commodities.
Futures contracts allow producers to lock in prices for their future production, safeguarding against potential price declines. Similarly, consumers can use futures to lock in prices for their future purchases, protecting against price increases.
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Q.28 What is horizontal spread in futures and options trading market?
It is the purchase of either a call or put option and the simultaneously a sale of the same type of option with typically the same strike price but with a different expiration month.
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Q.29 What role does the initial margin play in futures trading, and how does it relate to leverage?
The initial margin is the amount of money deposited by a trader when opening a futures position. It acts as collateral to cover potential losses. Leverage comes into play because traders can control a larger position with a smaller amount of margin, which magnifies both gains and losses.
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Q.30 State the price limit in futures and options trading market?
In Futures and Options Trading Market price Limit is the maximum advance or decline-from the previous day's settlement-permitted for a contract in one trading session by the rules of the exchange.
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Q.31 In what ways do futures contracts contribute to price transparency in the market?
Futures contracts are traded on organized exchanges with publicly available price information. The continuous trading and reporting of futures prices provide transparency and serve as a reference point for the pricing of the underlying assets.
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Q.32 In futures and options trading market, what is reciprocal of European terms?
It is one method of quoting exchange rates, which measured the U.S. dollar value of one foreign currency unit; i.e., U.S. dollars per foreign units.
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Q.33 How does the settlement process for futures contracts differ from that of forward contracts?
Futures contracts have daily mark-to-market settlements, meaning gains and losses are settled daily. Forward contracts are settled only at the contract's expiration. This frequent settlement in futures enhances transparency and reduces the risk of default.
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Q.34 In the derivatives market, what are the various types of membership?
Following are the various types of membership in the derivatives market are as follows:
Trading Member (TM) - A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients.
Clearing Member (CM) -These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed upon setting the trades through them.
Self-clearing Member (SCM) - A SCM are those clearing members who can clear and settle their own trades only.
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Q.35 Explain the concept of a forward contract and how it differs from other derivative contracts.
A forward contract is an agreement between two parties to buy or sell an asset at a predetermined price on a specific future date. Unlike futures contracts traded on exchanges, forwards are customized agreements between private parties and aren't as standardized.
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Q.36 What is pulpit in futures and options trading market?
it is a raised structure in the center of, or adjacent to, the pit or ring at a futures exchange where market reporters, employed by the exchange, record price changes as they occur in the trading pit.
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Q.37 How do forwards assist businesses and investors in managing their exposure to price fluctuations?
Forwards help businesses and investors hedge against price volatility. For instance, an airline might use a forward contract to lock in a future fuel price, protecting itself from sudden price spikes. Investors can also use forwards to speculate on price movements.
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Q.38 Give the put option in futures and options trading market?
Put Option in Futures and Options Trading Market is an option giving the option buyer the right but not the obligation to sell or "go short" the underlying futures contracts at the strike price on or before the expiration date.
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Q.39 What are the potential advantages and disadvantages of using forward contracts?
One advantage is customization; parties can tailor forward contracts to their specific needs. However, disadvantages include a lack of liquidity and counterparty risk, as there's a reliance on the other party to fulfill the contract.
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Q.40 In futures and options trading market what is federal fund?
Federal Fund in Futures and Options Trading Market is the fund that member bank deposits at the Federal Reserve; these funds are loaned by member banks to other member banks.
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Q.41 Provide an example of how a forward contract can be used in the commodities market.
A coffee producer, anticipating a bumper crop, might enter into a forward contract to sell a certain quantity of coffee beans at a fixed price to a coffee retailer. This ensures price stability for both parties.
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Q.42 What is in-the-money option in futures and options trading market?
It is an option having intrinsic value. A call option is in money if its strike price is below the current price of the underlying futures contract, While, a put option is in the money if its strike price is above the current price of the underlying futures contract.
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Q.43 What factors should parties consider when determining the price of a forward contract?
When determining the price of a forward contract, parties should consider the current spot price of the underlying asset, the expected future spot price, the time until contract expiration, interest rates, and any storage costs associated with the asset.
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Q.44 What is loan program in futures and options trading market?
It is A federal program in which the government lends money at preannounced rates to farmers and allows them to use the crops they plant for the upcoming crop year as collateral. Default on these loans is the primary method by which stock of agricultural commodities are acquired by the Government.
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Q.45 What potential challenges might arise due to the lack of standardization in forward contracts?
The lack of standardization in forward contracts can lead to difficulties in finding a counterparty willing to agree on specific terms. Also, valuing non-standardized contracts can be complex and subjective.
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Q.46 Explain the functioning of a three-way catalytic converter?
Conversion Factor in Futures and Options Trading Market is a factor used to equate the price of T-bond and T-note futures contracts with the various cash T-bonds and T-notes eligible for delivery. This is based on the relationship of the cash-instrument coupon to the required 6 percent deliverable grade of a futures contract as well as taking into account the cash instrument's maturity or call.
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Q.47 How can a forward contract be used to lock in a purchase price for an asset, such as real estate?
Suppose you plan to buy a property in six months, but you're concerned about price fluctuations. You can enter into a forward contract with the seller, agreeing on the purchase price now. This locks in the price, providing price certainty when you complete the purchase.
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Q.48 What is deferred (delivery) month in futures and options trading market?
As distinguished from the nearby (delivery) month, it is the more distant month(s) in which futures trading takes place.
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Q.49 What happens if one party in a forward contract defaults before the contract's expiration?
If one party defaults before the contract's expiration, the non-defaulting party could face difficulties finding a replacement counterparty. This could lead to legal complications and potential financial losses for both parties.
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Q.50 What is performance bond call program in futures and options trading market?
Because of adverse price movement performance Bond Call in Futures and Options Trading Market is a demand for additional funds.
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Q.51 Explain the term 'counterparty risk' in the context of forward contracts.
Counterparty risk refers to the risk that one of the parties involved in a forward contract may not fulfill their obligations. If one party defaults or fails to honor the contract, the other party could face financial losses or difficulties finding an alternative.
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Q.52 Explain standard tables in sap internal tables?
In Futures and Options Trading Market Wire House is an individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders.
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Q.53 Can you differentiate between a forward contract and a futures contract?
While both forward and futures contracts involve agreements to buy or sell assets at a future date, forward contracts are customized agreements traded OTC, while futures contracts are standardized agreements traded on exchanges with daily mark-to-market settlements.
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Q.54 What is forward (cash) contract in futures and options trading market?
It is a cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and non-standardized.
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Q.55 Explain the basic concept of an interest rate swap.
An interest rate swap is an agreement between two parties to exchange cash flows based on a notional principal amount. One party pays a fixed interest rate, and the other pays a floating interest rate. This allows both parties to effectively manage their interest rate exposure.
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Q.56 In futures and options trading market what is futures contract?
In Futures and Options Trading Market futures Contract is a legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. These are standardized according to the quality, quantity, and delivery time and location for each commodity. On an exchange trading floor, the only variable which is discovered is the Price.
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Q.57 How can a currency swap be beneficial for multinational corporations?
A currency swap allows a multinational corporation to obtain funding in one currency and convert it into another currency, thus mitigating currency risk. This enables the company to access lower borrowing costs and more favorable terms.
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Q.58 What is the primary purpose of a commodity swap?
The primary purpose of a commodity swap is to manage the price risk associated with commodities. For instance, an oil producer might enter a commodity swap to lock in a certain price for future oil deliveries, ensuring stability in revenue.
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Q.59 What factors determine the swap rates in an interest rate swap?
The swap rates in an interest rate swap are influenced by factors such as prevailing market interest rates, the credit risk of the counterparties, the term of the swap, and expectations about future interest rate movements.
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Q.60 How can a credit default swap (CDS) be used to manage credit risk?
A credit default swap allows an investor to hedge against the credit risk associated with a specific bond or debt instrument. The buyer of the CDS receives compensation in the event of a default by the issuer of the underlying bond.
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Q.61 What's the difference between a fixed-for-floating interest rate swap and a currency swap?
In a fixed-for-floating interest rate swap, one party pays a fixed interest rate while the other pays a floating interest rate. In a currency swap, parties exchange cash flows denominated in one currency for cash flows in another currency."
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Q.62 How do swap contracts differ from other derivative contracts in terms of their duration?
Swap contracts can have longer durations compared to other derivatives like options or futures. Some swaps can last for several years, allowing parties to manage interest rate or currency risk over a longer period.
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Q.63 Explain the concept of a notional principal amount in a swap contract.
The notional principal amount is a hypothetical value used to calculate cash flows in a swap contract. It's the basis on which interest payments are determined, but no actual exchange of principal occurs.
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Q.64 What's the primary purpose of a commodity swap?
A commodity swap helps parties manage the price risk associated with commodities. For instance, a producer might enter into a commodity swap to lock in a certain price for future commodity deliveries, providing revenue predictability.
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Q.65 In the context of a credit default swap (CDS), what does credit event' refer to?
In a credit default swap, a 'credit event' refers to the occurrence of a predefined event indicating that the issuer of the underlying bond has defaulted. This could include bankruptcy or failure to make interest or principal payments.
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Q.66 Explain the key difference between a call option and a put option.
A call option gives the holder the right, but not the obligation, to buy an underlying asset at a predetermined price (the strike price) before or on the option's expiration date. A put option, on the other hand, gives the holder the right to sell the underlying asset at the strike price.
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Q.67 How can investors use options to manage risk in their portfolios?
Investors can use options to hedge their portfolios against potential losses. For example, a stockholder can buy put options as insurance against a potential decline in the stock's value. If the stock falls, the put option gains value, offsetting the stock's loss.
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Q.68 What role does implied volatility play in options pricing?
Implied volatility reflects the market's expectation of how much an underlying asset's price will fluctuate. Higher implied volatility leads to higher options premiums, as there's a greater likelihood of larger price movements, making options more attractive.
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Q.69 What are the two main styles of options, and how do they differ in terms of exercise?
The two main styles of options are American options and European options. American options can be exercised at any time before or on the expiration date. European options can only be exercised on the expiration date itself.
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Q.70 Can you provide an example of how options can be used for income generation?
A covered call strategy involves selling call options against a stock you already own. If the stock's price remains below the strike price, the options expire worthless, and you keep the premium collected from selling the options as income.
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Q.71 How does the strike price of an option impact its premium?
The strike price is the price at which the underlying asset will be bought or sold. As the strike price gets closer to the current market price, the premium for the option generally increases, reflecting a higher potential for the option to be exercised profitably.
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Q.72 What factors might influence an options trader to choose between American options and European options?
The decision might depend on the trader's strategy and market conditions. American options offer more flexibility, as they can be exercised at any time. European options are simpler, as they can only be exercised at expiration.
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Q.73 Explain how the time decay phenomenon, known as theta, affects the value of options as they approach their expiration dates.
Theta measures the rate of time decay of an option's value as it approaches expiration. Options lose value over time, and theta accelerates this loss. Therefore, all else being equal, an option's value decreases as its expiration date approaches.
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Q.74 In what scenarios would an investor use a covered call strategy?
Investors might use a covered call strategy when they already own the underlying stock and want to generate additional income. By selling a call option on the stock they own, they collect the premium and might also benefit from any potential stock price appreciation.
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Q.75 What is a straddle, and how can it be used to capitalize on market volatility?
A straddle involves buying both a call and a put option with the same strike price and expiration date. It's used when an investor expects significant price movement but is unsure about the direction. The investor profits if the price moves significantly in either direction.
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Q.76 What defines a covered call position?
The purchase of a share of stock with a simultaneous sale of a call on that stock.
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Q.77 Which is a protective put strategy?
A long put plus a long position in the underlying asset.
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Q.78 What is the aim of performing risk analysis?
To best obtain collateral and security for the credit
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Q.79 Are options riskier than stocks?
Options have the unfair reputation of being considered riskier than other investments, Whereas stocks are considered as moderate-risk investments.
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Q.80 How many derivatives are there in India?
There are 4 distinct kinds of derivatives that can simply be exchanged in the Indian Stock Market. Every derivative is separate from the other and consist varying contract restrictions, risk portion and more.
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Q.81 When did derivatives start?
Derivatives trading, which began in June 2000, was a turning position in various ways. And after all the modifications had settled into place, NSE and BSE were both amongst the best 10 exchanges in the world by the amount of transactions.
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Q.82 Tell us something about trading system.
A trading system is a collection of commands that express buy and sell signals without any uncertainty or any subjective components . The principal aim of a such system is to maintain risk and to improve profitability in any market environment.
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Q.83 Is options trading Better Than stocks?
Options can be small risky for investors because they need more limited financial responsibility than equities, and they can also be short risky due to their relative imperviousness to the possibly catastrophic consequences of gap openings. Options are the dependable form of fence, and this also makes them safer than stocks.
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Q.84 How is MWPL calculated?
MWPL is measured on 20% of the non-promoter holding in the stock and involves positions taken in options and futures. For example, if the equity base of a company includes 100 shares with non-promoter holding at 40%, the number of shares admitted for MWPL will be 8 shares (20% of the 40 shares).
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Q.85 Do you think will options trading be forbidden?
Option trading won't be 'banned', but do note that businesses can shut down temporarily. Rare, but it happened right after 9/11.
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Q.86 Explain derivatives in NSE.
Derivatives, such as prospects or options, are financial obligations which derive their significance from a spot price, which is known as the “underlying”.
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Q.87 How does a trading system perform?
A trading system is based on several settings with specific rules associated to selling and buying in the financial markets. It takes a statistical interpretation of a number of trades and includes past accomplishments that have created profits from it.
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Q.88 Tell us the reason for the extension of derivative market?
Portions contributing to the bursting growth of derivatives are price lightness, globalization of the markets, technological improvements and advancements in the financial speculations. A price is what one pays to take or use something of value.
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Q.89 Why margin money is accumulated?
This decreases the risk of any transaction default, which usually has a chain reaction. When margins are obtained from the client, the broker is not placed at undue risk due to it is eventually the broker who, as a member, is responsible to the exchange. Margins accommodate to decrease the broker risk.
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Q.90 Do you know who is the father of derivatives?
The modern growth of calculus is normally attributed to Gottfried Wilhelm Leibniz (1646–1716), and Isaac Newton (1643–1727),who produced independent and unified access to differentiation and derivatives.
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Q.91 What is largest derivative market?
The National Stock Exchange of India caught the CME Group to become the most extensive derivatives exchange in the world in 2019. Mumbai-based NSE traded 5.96 trillion contracts in 2019 to CME Group's 4.83 trillion.
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Q.92 What is the scope of derivatives?
The key purpose of a derivative is the administration and particularly the mitigation of risk. When a derivative agreement is entered, 1 party to the deal typically needs to free itself of a particular risk, connected to its commercial projects, such as currency or interest rate risk, over a given period of time.
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Q.93 How do you create a trading system?
Determine your time frame. Identify the position of the market. Find support and resistance levels. Find your levels. Find your exit levels. Use multiple time frame analysis.
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Q.94 Describe the 2 types of trade.
Trade is a piece of commerce and is limited to the act of purchasing and selling of goods. Trade is divided into two categories - Internal and External Trade. These two types of trade are further classified into various types.
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Q.95 How is used margin calculated?
To determine the quantity of margin used, multiply the size of the trade by the margin percentage. Subtracting the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.
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Q.96 Define position limit.
A position limit is a preset level of ownership built by exchanges or regulators that restricts the number of shares or secondary contracts that a trader, or any associated group of traders and investors, may own.
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Q.97 How long can one continue a margin trade?
One can keep the loan as long as they want, given they fulfill the obligations.
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Q.98 Are options trading worth?
Yes, Option Trading is very much worth it. Let me Refine, Options are a kind of Derivatives contract where the owners of the contract will have the power to Buy/Sell the underlying asset.
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Q.99 What is Oi restriction?
Every brokerage firm has a limitation in terms of maximum (OI) Open interest or total positions that can be taken beyond futures and options of any scrip, across all its customers.
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Q.100 Is algo trading safe?
Algo trading is secure when you have a decent knowledge of the systems, markets, trading policies, and coding abilities. Algo trading may appear complex due to several factors included, but it is not an unmanageable task. Algo trading helps create higher profits when applied correctly.
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Q.101 What is price index formula?
A price index is a weighted standard of the prices of a chosen basket of goods and services related to their prices in some base-year. To determine the Price Index, practice the price of the Market Basket of the year of interest and divide by the price of the Market Basket of the base year, then multiply by 100.
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Q.102 What is suggested by Wholesale Price Index?
A (WPI) wholesale price index is an index that estimates and follows the modifications in the price of goods in the steps before the retail. This applies to goods that are sold in majority and traded between substances or businesses.
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Q.103 Which is the oldest type of derivative?
Forward contracts are the purest form of derivatives that are prepared today. Also, they are the oldest kind of derivatives. A forward contract is blank but an agreement to sell something at a future date.
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Q.104 Does the UK practice RPI or CPI?
Today, the UK practices a number of indices to track price fluctuations, involving the (CPI) Consumer Price Index, which was inaugurated in 2003, and the much older (RPI) Retail Price Index which was introduced in 1947.
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