TEST BANK
AN INTRODUCTION TO DERIVATIVE SECURITIES, FINANCIAL MARKETS, AND RISK MANAGEMENT
ROBERT JARROW, ARKADEV CHATTERJEA
2nd Edition
, Test Bank for An Introduction to Derivative
Securities, Financial Markets, and Risk
Management, 1e Robert Jarrow, Arkadev
Chatterjea
CHAPTER 1: Derivatives and Risk Management
MULTIPLE CHOICE
1. The following is NOT a feature of current derivatives markets:
a. there is a huge variety in the number and type of derivatives contracts that are traded
b. the derivatives markets are now global and measured in trillions of dollars
c. commodity derivatives have emerged as the most popular kind of derivatives
traded in the new millennium
d. colleges and universities now offer many kinds of derivative courses
e. Wall Street firms hire graduate degree holders in finance and quantitative
methods for designing and trading derivatives
ANS: C DIF: Easy REF: 1.1 TOP:
Introduction MSC: Factual
2. A derivative security:
a. is useful only for speculation
b. is useful only for hedging
c. is useful only for manipulating markets
d. can be used for all of these purposes
e. is useful for none of these purposes
ANS: D DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
3. Foreign exchange prices became volatile during the 1970s mainly because of:
a. an end of the policy of fixing interest rates by the US Federal Reserve Bank
b. the demise of the Bretton Woods system of fixed exchange rates
c. supply shocks of the 1970s
d. technology that helped us overcome the vagaries of Mother Earth
e. hedge funds manipulating exchange trades
ANS: B DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
4. Interest rates in the United States became volatile during the late 1970s mainly due to:
a. an end of the policy of fixing interest rates by the US Federal Reserve Bank
b. the demise of the Bretton Woods system of fixed exchange rates
c. technological changes that enabled banks to modify interest rates
d. hedge funds manipulating interest rates
ANS: A DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
5. The International Monetary Market is:
a. an OTC market where money market instruments trade
1|Page
, b. a part of the World Bank that lends funds to developing countries
c. a division of the Chicago Mercantile Exchange created for trading foreign currency
futures
d. a London-based market for interbank lending
e. None of these answers are correct.
ANS: C DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
6. In the United States, the Great Moderation refers to:
a. a 15-year-long period that began around 1900 during which the growth of
real output fluctuated, inflation declined, stock market volatility was
reduced, and business cycles were moderated
b. the time period between 1920 and 1933 when sale, manufacture, and
transportation of alcohol was prohibited
c. a time period that began in 1955 and lasted for nearly a decade during
which business cycle fluctuations declined and inflation was under control
d. a time period that began after World War II and lasted for nearly a decade
during the growth of real output fluctuated, inflation declined, stock market
volatility was reduced, and business cycles were moderated
e. a time period that began during the mid-1980s and lasted a little over two
decades during which the growth of real output fluctuated, inflation declined,
stock market volatility was reduced, and business cycles were moderated
ANS: E DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
7. Nobel Prize–winning economist Ronald Coase’s view is:
a. arbitrage is the adhesive that holds financial markets together
b. derivatives destroy financial markets via excessive speculation
c. derivatives improve social welfare through better risk allocation in the economy
d. firms often appear when they can lower transaction costs
e. regulations and taxes cause financial innovation
ANS: D DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
8. The following was NOT an example cited by Nobel laureate economist Merton Miller in
support of his view that “regulations and taxes cause financial innovation”:
a. Eurobonds
b. Eurodollars
c. futures contracts
d. swaps
e. zero-coupon bonds
ANS: C DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
9. In financial markets, a coupon refers to:
a. the detachable part of a stock that entitles the holder to get dividends from the
company
b. the interest paid on a bond on a regular basis, typically semiannually
c. one side of a financial swap that entitles the holder to net payments
d. the discount from the principal amount at which a zero-coupon bond is sold in the
market
e. a paper on whose submission a trader gets a reduction in brokerage fees
ANS: B DIF: Moderate REF: 1.3 TOP: Traded Derivative
Securities
2|Page
, MSC: Factual
10. Who has described derivatives as “time bombs, both for the parties that deal in them and
the economic system”?
a. Warren Buffett
b. Ronald Coase
c. Alan Greenspan
d. Peter Lynch
e. Merton Miller
ANS: A DIF: Easy REF: 1.3 TOP: Traded Derivative
Securities MSC: Factual
11. Which of the following statements is INCORRECT?
a. Derivatives trade in zero net supply markets.
b. A derivatives trade is a zero-sum game in the absence of market
imperfections like transaction costs.
c. Derivatives are powerful financial tools that can be used for speculation
as well as hedging.
d. Derivatives have a history of always causing significant losses to any trader
who trades these contracts.
e. Derivatives can help traders to reduce price risk from economic activities.
ANS: D DIF: Moderate REF: 1.3 TOP: Traded Derivative
Securities MSC: Factual
12. Suppose regulators cap the maximum interest one can charge at 5 percent. Let the
underlying market interest rate be 8 percent. Charging anything lower will drive you
out of business.
You devise a compensatory balance scheme: for every $100 that the customer
borrows, she will have to keep a certain amount with you as a compensatory balance.
What should the amount of the loan and the compensatory balance be if the customer
wants to borrow $5,000?
a. $5,000 loan and $1,000 as compensatory balance
b. $5,000 loan and $1,500 as compensatory balance
c. $5,000 loan and $3,000 as compensatory balance
d. $8,000 loan and $3,000 as compensatory balance
e. $8,000 loan and $5,000 as compensatory balance
ANS: D DIF: Difficult REF: 1.3 TOP: Traded Derivative
Securities MSC: Applied
13. The Basel Committee’s Risk Management Guidelines for Derivatives (July 1994) did NOT
list which of the following risks?
a. credit risk
b. legal risk
c. liquidity risk
d. market risk
e. value-at-risk
ANS: E DIF: Easy REF: 1.5
TOP: The Regulator’s Classification of Risk MSC: Factual
14. Which of the following risks can be very difficult to hedge?
a. credit risk
b. legal risk
c. market risk
3|Page
AN INTRODUCTION TO DERIVATIVE SECURITIES, FINANCIAL MARKETS, AND RISK MANAGEMENT
ROBERT JARROW, ARKADEV CHATTERJEA
2nd Edition
, Test Bank for An Introduction to Derivative
Securities, Financial Markets, and Risk
Management, 1e Robert Jarrow, Arkadev
Chatterjea
CHAPTER 1: Derivatives and Risk Management
MULTIPLE CHOICE
1. The following is NOT a feature of current derivatives markets:
a. there is a huge variety in the number and type of derivatives contracts that are traded
b. the derivatives markets are now global and measured in trillions of dollars
c. commodity derivatives have emerged as the most popular kind of derivatives
traded in the new millennium
d. colleges and universities now offer many kinds of derivative courses
e. Wall Street firms hire graduate degree holders in finance and quantitative
methods for designing and trading derivatives
ANS: C DIF: Easy REF: 1.1 TOP:
Introduction MSC: Factual
2. A derivative security:
a. is useful only for speculation
b. is useful only for hedging
c. is useful only for manipulating markets
d. can be used for all of these purposes
e. is useful for none of these purposes
ANS: D DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
3. Foreign exchange prices became volatile during the 1970s mainly because of:
a. an end of the policy of fixing interest rates by the US Federal Reserve Bank
b. the demise of the Bretton Woods system of fixed exchange rates
c. supply shocks of the 1970s
d. technology that helped us overcome the vagaries of Mother Earth
e. hedge funds manipulating exchange trades
ANS: B DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
4. Interest rates in the United States became volatile during the late 1970s mainly due to:
a. an end of the policy of fixing interest rates by the US Federal Reserve Bank
b. the demise of the Bretton Woods system of fixed exchange rates
c. technological changes that enabled banks to modify interest rates
d. hedge funds manipulating interest rates
ANS: A DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
5. The International Monetary Market is:
a. an OTC market where money market instruments trade
1|Page
, b. a part of the World Bank that lends funds to developing countries
c. a division of the Chicago Mercantile Exchange created for trading foreign currency
futures
d. a London-based market for interbank lending
e. None of these answers are correct.
ANS: C DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
6. In the United States, the Great Moderation refers to:
a. a 15-year-long period that began around 1900 during which the growth of
real output fluctuated, inflation declined, stock market volatility was
reduced, and business cycles were moderated
b. the time period between 1920 and 1933 when sale, manufacture, and
transportation of alcohol was prohibited
c. a time period that began in 1955 and lasted for nearly a decade during
which business cycle fluctuations declined and inflation was under control
d. a time period that began after World War II and lasted for nearly a decade
during the growth of real output fluctuated, inflation declined, stock market
volatility was reduced, and business cycles were moderated
e. a time period that began during the mid-1980s and lasted a little over two
decades during which the growth of real output fluctuated, inflation declined,
stock market volatility was reduced, and business cycles were moderated
ANS: E DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
7. Nobel Prize–winning economist Ronald Coase’s view is:
a. arbitrage is the adhesive that holds financial markets together
b. derivatives destroy financial markets via excessive speculation
c. derivatives improve social welfare through better risk allocation in the economy
d. firms often appear when they can lower transaction costs
e. regulations and taxes cause financial innovation
ANS: D DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
8. The following was NOT an example cited by Nobel laureate economist Merton Miller in
support of his view that “regulations and taxes cause financial innovation”:
a. Eurobonds
b. Eurodollars
c. futures contracts
d. swaps
e. zero-coupon bonds
ANS: C DIF: Easy REF: 1.2 TOP: Financial
Innovation MSC: Factual
9. In financial markets, a coupon refers to:
a. the detachable part of a stock that entitles the holder to get dividends from the
company
b. the interest paid on a bond on a regular basis, typically semiannually
c. one side of a financial swap that entitles the holder to net payments
d. the discount from the principal amount at which a zero-coupon bond is sold in the
market
e. a paper on whose submission a trader gets a reduction in brokerage fees
ANS: B DIF: Moderate REF: 1.3 TOP: Traded Derivative
Securities
2|Page
, MSC: Factual
10. Who has described derivatives as “time bombs, both for the parties that deal in them and
the economic system”?
a. Warren Buffett
b. Ronald Coase
c. Alan Greenspan
d. Peter Lynch
e. Merton Miller
ANS: A DIF: Easy REF: 1.3 TOP: Traded Derivative
Securities MSC: Factual
11. Which of the following statements is INCORRECT?
a. Derivatives trade in zero net supply markets.
b. A derivatives trade is a zero-sum game in the absence of market
imperfections like transaction costs.
c. Derivatives are powerful financial tools that can be used for speculation
as well as hedging.
d. Derivatives have a history of always causing significant losses to any trader
who trades these contracts.
e. Derivatives can help traders to reduce price risk from economic activities.
ANS: D DIF: Moderate REF: 1.3 TOP: Traded Derivative
Securities MSC: Factual
12. Suppose regulators cap the maximum interest one can charge at 5 percent. Let the
underlying market interest rate be 8 percent. Charging anything lower will drive you
out of business.
You devise a compensatory balance scheme: for every $100 that the customer
borrows, she will have to keep a certain amount with you as a compensatory balance.
What should the amount of the loan and the compensatory balance be if the customer
wants to borrow $5,000?
a. $5,000 loan and $1,000 as compensatory balance
b. $5,000 loan and $1,500 as compensatory balance
c. $5,000 loan and $3,000 as compensatory balance
d. $8,000 loan and $3,000 as compensatory balance
e. $8,000 loan and $5,000 as compensatory balance
ANS: D DIF: Difficult REF: 1.3 TOP: Traded Derivative
Securities MSC: Applied
13. The Basel Committee’s Risk Management Guidelines for Derivatives (July 1994) did NOT
list which of the following risks?
a. credit risk
b. legal risk
c. liquidity risk
d. market risk
e. value-at-risk
ANS: E DIF: Easy REF: 1.5
TOP: The Regulator’s Classification of Risk MSC: Factual
14. Which of the following risks can be very difficult to hedge?
a. credit risk
b. legal risk
c. market risk
3|Page
