Exam of Beloy (1st)

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Answer 4

False

Question 5

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

Answer 5

False

Question 6

Most derivative contracts terminate with delivery of the underlying asset.

Answer 6

False

Question 7

Swaps, like options, trade on organized exchanges.

Answer 7

True

Question 8

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

Answer 8

False

Question 9

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

Answer 9

False

Question 10

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

Answer 10

True

Question 11

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

Answer 11

True

Question 12

Derivatives permit invertors to manage their risk more efficiently.

Answer 12

True

Question 13

Lower transaction costs are one advantage of derivative markets.

Answer 13

True

Question 14

Derivative markets make stock and bond markets more efficient.

Answer 14

True

Question 15

Speculation is equivalent to gambling.

Answer 15

False

Question 16

Storing an asset entails risk.

Answer 16

True

Question 17

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

Answer 17

False

Question 18

Derivatives are securities and not contracts.

Answer 18

False

Question 19

Short selling is a high-risk activity.

Answer 19

True

Question 20

Swap obligate delivery of either bonds or stocks.

Answer 20

False

Question 21

The market value of the derivatives contracts worldwide totals.

Answer 21

Over a trillion dollars but less than a hundred trillon

Question 22

Cash markets are also known as

Answer 22

Spot markets

Question 23

A call option gives the holder

Answer 23

The right to buy something

Question 24

Which of the following instruments are Contracts but are not securities?

Answer 24

E. B(options) and C(Swaps)

Question 25

The positive relationship between risk and return is called

Answer 25

A. None of the above

Question 26

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

Answer 26

C. A hedge

Question 27

Which of the following are advantages of derivatives?

Answer 27

E. All of the above

Question 28

A forward contract has which of the following characteristics?

Answer 28

A. Has a buyer and a seller

Question 29

Options on futures are also known as

Answer 29

B. Commodity options

Question 30

A market in which the price equals the true economic value

Answer 30

D. Is efficient

Question 31

Which of the following trade on organized exchanges?

Answer 31

C. Options

Question 32

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

Answer 32

D. A(Futures) B(Forwards)

Question 33

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

Answer 33

C. Risk Neutral

Question 34

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

Answer 34

Investors are risk neutral

Question 35

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

Answer 35

B. Futures

Question 36

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

Answer 36

B. Financial Engineering

Question 37

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

Answer 37

C. Shorting

Question 38

In which one of the following types of contracts 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.

Answer 38

A. Repurchase Agreement

Question 39

The expected return minus the risk free rate is called.

Answer 39

A. The risk premium

Question 40

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?

Answer 40

D. Arbitrage Transaction