Deck 1: Introduction

Question 1

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

Answer 1

E

Question 2

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

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

Answer 2

futures
options

Question 3

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

Answer 3

A

Question 4

Which of the following trade on organized exchanges?

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

Question 5

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
CHAPTER 1: INTRODUCTION

Question 6

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 7

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 8

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 9

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 10

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 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

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 13

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 14

Cash markets are also known as

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

Question 15

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 16

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 17

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 18

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

Question 19

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

Question 20

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 21

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

Question 22

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

Question 23

Most derivative contracts terminate with delivery of the underlying asset.

Question 24

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

Question 25

Lower transaction costs are one advantage of derivative markets.

Question 26

Derivatives permit investors to manage their risk more efficiently.

Question 27

Short selling is a high risk activity.

Question 28

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

Question 29

Storing an asset entails risk.

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

Swaps,like options,trade on organized exchanges.

Question 35

Derivative markets make stock and bond markets more efficient.

Question 36

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

Question 37

Speculation is equivalent to gambling.

Question 38

Derivatives are securities and not contracts.

Question 39

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

Question 40

Swaps obligate delivery of either bonds or stocks.
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