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

Accepted Answer

The positive relationship between risk and return doesn't have a specific name listed among the options provided. It is a fundamental concept in finance that higher risk is associated with the potential for higher returns, but it is not specifically called expected return, market efficiency, the law of one price, or arbitrage.

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

Accepted Answer

Price discovery is the process by which markets determine the price of a particular asset through the interactions of buyers and sellers. It involves the aggregation of various pieces of information, including supply and demand, investor sentiment, and broader economic indicators, to arrive at a price at which a financial instrument can be traded.
A) Forwards: Forward markets involve private agreements between two parties to buy or sell an asset at a specified price on a future date. While forwards can contribute to price discovery, they are over-the-counter (OTC) contracts and are not as transparent as exchange-traded instruments. Therefore, they may have a more limited role in price discovery compared to more transparent markets.
B) Futures: Futures markets are highly standardized exchange-traded contracts that obligate the buyer to purchase, or the seller to sell, a specific quantity of an asset at a predetermined price on a specified future date. Futures markets are central to price discovery because they are transparent, accessible to many participants, and provide real-time pricing information.
C) Options: Options markets are also exchange-traded and provide the right, but not the obligation, to buy or sell an asset at a specified price within a certain period. Options prices can reflect the market's expectations of future price movements and volatility, contributing significantly to the price discovery process.
Considering the above explanations, the correct answer to the question "Which of the following markets is/are said to provide price discovery?" would be:
E) b and c (Futures and Options)
Both futures and options markets are known for their role in price discovery due to their transparency, liquidity, and the wide participation of market players.

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

Accepted Answer

A repurchase agreement, also known as a repo, is a contract between a seller (who is usually a financial institution) and a buyer where the seller agrees to sell a specified asset (usually bonds, securities or other financial instruments) to the buyer today and then buy it back at a specified time in the future at an agreed future price. This is essentially a short-term collateralized loan where the buyer gets the use of the asset for a period of time and the seller gets liquidity in exchange for interest or a fee.

Question 4

Which of the following trade on organized exchanges?
A)caps
B)forwards
C)options
D)swaps
E)none of the above

Accepted Answer

Options trade on organized exchanges. Caps, forwards, and swaps are traded over-the-counter (OTC) rather than on organized exchanges.

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

Accepted Answer

When the law of one price is violated, meaning the same good sells for different prices in different markets, an arbitrage transaction opportunity is created. Arbitrage involves buying the good in the market where it is cheaper and selling it in the market where it is more expensive to profit from the price difference.

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

Accepted Answer

Options on futures are commonly known as commodity options as they allow the buyer to purchase or sell a specified quantity of a particular commodity at a predetermined price at a future date. They are different from security options, which involve trading options on stocks or other securities. Spot options and exchange options are not terms commonly used to describe options on futures.

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

Accepted Answer

A call option is a contract that gives the holder the right, but not the obligation, to buy an underlying asset at a specified price (strike price) within a certain time period. Therefore, the holder has the right to buy something (the underlying asset) if they choose to exercise the option.

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

Accepted Answer

All of the above advantages are associated with derivatives. They have lower transaction costs than securities and commodities, reveal information about expected prices and volatility, help control risk, and make spot prices stay closer to their true values.

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

Accepted Answer

A market in which the price equals the true economic value is efficient, meaning that all available information is reflected in the price. Therefore, it is not possible to consistently outperform the market through superior knowledge or analysis, making it difficult to generate high expected returns. While it may be organized, it is not necessarily risk-free as there may still be market and business risks involved.

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

Accepted Answer

The answer of The market value of the derivatives contracts...

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

Accepted Answer

The process of creating new financial products is commonly known as financial engineering, which involves using mathematical and quantitative analysis to design innovative financial instruments and products that can meet the evolving needs of the market. This process is often carried out by financial institutions, banks, and investment firms seeking to gain a competitive edge in the market and increase their profits by creating new investment opportunities.

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

Accepted Answer

Investors who do not consider risk in their decisions are said to be risk neutral. Speculating and short selling require consideration of risk in their decisions, while traders may or may not consider risk depending on their approach. Therefore, the best choice is C, risk neutral.

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

Accepted Answer

The process described is known as shorting. It involves borrowing assets, selling them, and then buying them back at a later date and lower price in order to make a profit. This is a common practice in trading and investing, particularly in markets where investors believe that the value of an asset will decline in the near future.

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

Accepted Answer

Cash markets are also known as spot markets, where financial instruments are traded for immediate settlement and delivery. Speculative markets refer to markets where participants hope to profit from price changes without actually owning the underlying asset. Derivative markets involve contracts whose value is derived from an underlying asset, such as options or futures. Dollar markets typically refer to the market for US dollars in a particular location or country.

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

Accepted Answer

Forward contracts involve a buyer and a seller who agree on a transaction at a future date, but they do not trade on an organized exchange, do not have daily settlements, and involve obligations rather than rights.

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

Accepted Answer

Futures contracts obligate a buyer to buy or sell an asset at a predetermined future date and price.

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

Accepted Answer

This is a hedge. By selling a futures contract or writing a call, the investor is protecting themselves against potential losses in the spot market. This is considered a risk management strategy rather than a speculative position or a gamble. It is not a risk-free transaction, as there is always some degree of risk involved in investing.

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
E)none of the above

Accepted Answer

None of the above statements are not true about the law of one price as they are all accurate descriptions of the law. However, if we had to choose one that is not strictly true, it would be D because investors can have varying levels of risk aversion, not necessarily being completely risk neutral.

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

Accepted Answer

The expected return minus the risk-free rate is called the risk premium. It is the excess return that an investor expects to receive as compensation for taking on additional risk by investing in a risky asset. Therefore, Choice A is the correct answer.

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

Accepted Answer

Stocks and options are both considered securities, while swaps are a type of contract but are not classified as securities. Therefore, option A is incorrect because stocks are securities, and option B is incorrect because options are also securities. Option C is correct because swaps are contracts but not securities. Option D is incorrect because it includes both A and B, which are both securities. The correct answer is therefore E, which accurately identifies the two instruments that are contracts but not securities (options and swaps).

Quiz 1: Introduction

The positive relationship between risk and return is called

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

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.

Which of the following trade on organized exchanges?

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?

Options on futures are also known as

A call option gives the holder

Which of the following are advantages of derivatives?

A market in which the price equals the true economic value

The market value of the derivatives contracts worldwide totals

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

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

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

Cash markets are also known as

A forward contract has which of the following characteristics?

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

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

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

The expected return minus the risk-free rate is called

Which of the following instruments are contracts but are not securities