Apr 18, 2016

Finance English practice: Unit 35 — Derivatives

18 cards
, 64 answers
  • Complete the sentences below. Use the key words if necessary.
    • Options

      key words
      Derivatives      ○      options      ○      swaps      ○      give the right      ○      buy a call option      ○      buy a put option


      are financial products whose value depends on — or is derived from — another financial product, such as a stock, a stock market index, or interest rate payments. They can be used to manage the risks associated with securities, to protect against fluctuations in value, or to speculate. The main kinds of derivatives are and .

      Options are like futures (see Unit 34) except that they — give the possibility, but not the obligation — to buy or sell an asset in the future. If you it gives you the right to buy an asset for a specific price, either at any time before the option ends or on a specific future date. However, if you , it gives you the right to sell an asset at a specific price within a specified period or on a specific future date. Investors can buy put options to hedge against falls in the price of stocks.

      In-the-money and out-of-the-money

      key words
      writing      ○      exercises the option      ○      premium      ○      out-of-the-money      ○      strike price      ○      exercise price      ○      in-the-money


      Selling or option contracts involves the obligation either to deliver or to buy assets, if the buyer — chooses to make the trade. For this the seller (writer) receives a fee called a from the buyer. But writers of options do not expect them to be exercised. For example, if you expect the price of a stock to rise from 100 to 120, you can buy a call option giving the right to buy the stock at 110. If the stock price does not rise to 110, you will not exercise the option, and the seller of the option will gain the premium.

      Your option will be , as the stock is trading at below the or of 110, the price stated in the option. If, on the other hand, the stock price rises above 110, you are : you can exercise the option and you will gain the difference between the current market price and 110. If the market moves in an unexpected direction, the writers of options can lose enormous amounts of money.

      Warrants and swaps

      key words
      warrants      ○      Swaps


      Some companies issue which, like options, give the right, but not the obligation, to buy stocks in the future at a particular price, probably higher than the current market price. They are usually issued along with bonds, but they can generally be detached from the bonds and traded separately. Unlike call options, which last three, six or nine months, warrants have long maturities of up to ten years.

      are arrangements between institutions to exchange interest rates or currencies (e.g. dollars for yen). For example, a company that has borrowed money by issuing floating-rate notes (see Unit 33) could protect itself from a rise in interest rates by arranging with a bank to swap its floating-rate payments for a fixed-rate payment, if the bank expected interest rates to fall.

    • Match the two parts of the sentences.
      • The price of a derivative always depends on  . . . 
        the price of another financial product.
        • future price changes.
        • the price of another financial product.
        • the right to sell something.
        • the right to buy something.

      • Options can be used to hedge against  . . . 
        future price changes.
        • future price changes.
        • the right to buy something.
        • the right to sell something.
        • the price of another financial product.

      • A call option gives its owner  . . . 
        the right to buy something.
        • the right to buy something.
        • future price changes.
        • the price of another financial product.
        • the right to sell something.

      • A put option gives its owner  . . . 
        the right to sell something.
        • the price of another financial product.
        • the right to buy something.
        • future price changes.
        • the right to sell something.

    • Choose the correct endings for the sentences. Some sentences have more than one possible ending.
      • If you expect the price of a stock to rise, you can  . . . 
        buy a call option OR sell a put option.
        • buy a put option.
        • sell a put option.
        • sell a call option.
        • buy a call option.

      • If you expect the price of a stock to fall, you can  . . . 
        sell a call option OR buy a put option.
        • sell a call option.
        • buy a put option.
        • sell a put option.
        • buy a call option.

      • If an option is out-of-the-money it will  . . . 
        not be exercises.
        • not be exercises.
        • be exercised.

      • If an option is in-the-money the seller will  . . . 
        lose money.
        • gain money.
        • lose money.

      • The bigger risk is taken by  . . . 
        writers of options.
        • writers of options.
        • buyers of options.

    • Complete the definitions.
      •  . . . 
        Warrants
        are like call options, but with much longer time spans.
        • Swaps
        • Warrants
        • Put options

      •  . . . 
        Put options
        give the right to sell securities at a fixed price within a specified period.
        • Warrants
        • Put options
        • Swaps

      •  . . . 
        Swaps
        can be used to speculate on interest rate movements.
        • Warrants
        • Swaps
        • Put options

    • Complete these sentences.
      • If your put option is out-of-the-money, the seller will gain the  . . . 
        premium
        .
        • premium
        • exercise price

      • You only exercise a call option if the market price is higher than the  . . . 
        strike/exercise price
        .
        • premium
        • strike/exercise price

      • If I expect a stock price to go up in the short term, I buy  . . . 
        call options
        instead of the stock.
        • put options
        • call options

      • If I expect a big company’s stock price to go up in the long term, I sometimes buy their  . . . 
        warrants
        .
        • warrants
        • swap

      • We needed euros and had a lot of dollars in the bank, so we did a  . . . 
        swap
        with a German company which needed dollars.
        • swap
        • warrants

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