Deck 1: Introduction

Question 1

The expected return minus the risk-free rate is called

A) the risk premium
B) the percentage return
C) the asset's beta
D) the return premium
E) none of the above

Answer 1

A

Question 2

Which of the following statements is not true about the law of one price

A) investors prefer more wealth to less
B) investments that offer the same return in all states must pay the risk-free rate
C) if two investment opportunities offer equivalent outcomes, they must have the same price
D) investors are risk neutral
D) none of the above

Answer 2

D

Question 3

Cash markets are also known as

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

Answer 3

B

Question 4

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 5

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 6

When the law of one price is violated in that the same good is selling for two different prices, an opportunity for what type of transaction is created?

A) return-to-equilibrium transaction
B) risk-assuming transaction
C) speculative transaction
D) arbitrage transaction
E) none of the above

Question 7

In which one of the following types of contract between a seller and a buyer does the seller agree to sell a specified asset to the buyer today and then buy it back at a specified time in the future at an agreed future price.

A) repurchase agreement
B) short selling
C) swap
D) call
E) none of the above

Question 8

Which of the following trade on organized exchanges?

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

Question 9

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 10

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 11

The process of creating new financial products is sometimes referred to as

A) financial frontiering
B) financial engineering
C) financial modeling
D) financial innovation
E) none of the above

Question 12

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 13

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 14

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 15

The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as

A) longing an asset
B) asset flipping
C) shorting
D) anticipated price fall arbitrage
E) none of the above

Question 16

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 17

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 18

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 19

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

Question 20

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 21

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

Question 22

Derivatives permit investors to manage their risk more efficiently.

Question 23

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

Question 24

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

Question 25

Short selling is a high risk activity.

Question 26

Hybrid derivatives involve either bonds or stocks.

Question 27

Storing an asset entails risk.

Question 28

Lower transaction costs are one advantage of derivative markets.

Question 29

Swaps, like options, trade on organized exchanges.

Question 30

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

Question 31

A seller of a put option on a futures contract obligates them to buy a futures contract should the put buyer exercise the option.

Question 32

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

Question 33

Most derivative contracts terminate with delivery of the underlying asset.

Question 34

Exchange-traded derivatives volume is less than one billion according to the Futures Industry magazine in 2010.

Question 35

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

Question 36

A call option on a futures contract gives the buyer the right to buy a futures contract.

Question 37

Derivative markets make stock and bond markets more efficient.

Question 38

Speculation is equivalent to gambling.

Question 39

The top ten derivatives exchanges have less than 50 percent of trading volume.

Question 40

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