Deck 1: Introduction

Question 1

Derivatives permit investors to manage their risk more efficiently.

Answer 1

True

Question 2

Which of the following trade on organized exchanges?

A)caps
B)forwards
C)options
D)swaps
E)none of the above

Answer 2

C

Question 3

Which of the following are advantages of derivatives?

A)lower transaction costs than securities and commodities
B)reveal information about expected prices and volatility
C)help control risk
D)make spot prices stay closer to their true values
E)all of the above

Answer 3

E

Question 4

A market in which the price equals the true economic value

A)is risk-free
B)has high expected returns
C)is organized
D)is efficient
E)all of the above

Question 5

Options,forwards,swaps,and futures are financial assets.

Question 6

The absence of a daily settlement is one of the factors distinguishing a forward contract from a futures contract.

Question 7

A risk premium is the additional return investors expect for assuming risk.

Question 8

The law of one price states that the price of an asset cannot change.

Question 9

Investors who do not consider risk in their decisions are said to be

A)speculating
B)short selling
C)risk neutral
D)traders
E)none of the above

Question 10

Options on futures are also known as

A)spot options
B)commodity options
C)exchange options
D)security options
E)none of the above

Question 11

A call option gives the holder

A)the right to buy something
B)the right to sell something
C)the obligation to buy something
D)the obligation to sell something
E)none of the above

Question 12

A transaction in which an investor holds a position in the spot market and sells a futures contract or writes a call is

A)a gamble
B)a speculative position
C)a hedge
D)a risk-free transaction
E)none of the above

Question 13

Which of the following instruments are contracts but are not securities

A)stocks
B)options
C)swaps
D)a and b
E)b and c

Question 14

A forward contract has which of the following characteristics?

A)has a buyer and a seller
B)trades on an organized exchange
C)has a daily settlement
D)gives the right but not the obligation to buy
E)all of the above

Question 15

The market value of the derivatives contracts worldwide totals

A)less than a trillion dollars
B)in the hundreds of trillion dollars
C)over a trillion dollars but less than a hundred trillion
D)over quadrillion dollars
E)none of the above

Question 16

The positive relationship between risk and return is called

A)expected return
B)market efficiency
C)the law of one price
D)arbitrage
E)none of the above

Question 17

Cash markets are also known as

A)speculative markets
B)spot markets
C)derivative markets
D)dollar markets
E)none of the above

Question 18

Which of the following contracts obligates a buyer to buy or sell something at a later date?

A)call
B)futures
C)cap
D)put
E)swaption

Question 19

Which of the following markets is/are said to provide price discovery?
A)forwards

A)futures
B)options
C)a and b
E)b and c

Question 20

Arbitrage is a transaction designed to capture profits resulting from market efficiency.

Question 21

Most derivative contracts terminate with delivery of the underlying asset.

Question 22

The theoretical fair value is the only value an asset can have.

Question 23

Storing an asset entails risk.

Question 24

Speculation is equivalent to gambling.

Question 25

Short selling is a high risk activity.

Question 26

Swaps,like options,trade on organized exchanges.

Question 27

Derivative markets make stock and bond markets more efficient.

Question 28

Uncertainty of future sales and cost of inputs are examples of financial risks businesses may face.

Question 29

Lower transaction costs are one advantage of derivative markets.