Derivative Markets and Instruments
(Test 2)
1. Which of the following most accurately describes a derivative
security?
A. Always increase risk
B. Has no expiration date
C. Has a payoff based on an asset value or interest rate: C
-A derivatives value is derived from another asset or an interest rate
2. Which of the following statements about exchange-traded
derivatives is least accurate?
A. are liquid
B. are standardized contracts
C. carry significant default risk: C
-Exchange-traded derivatives have relatively low default risk because the clearinghouse stands
between the counter parties involved in most contracts
3. A custom agreement to purchase a specific T-bond next Thursday
for $1,000 is:
A. An option
B. A futures contract
C. A forward commitment: C
-This type of custom contract is a forward commitment
4. A call option is:
A. The right to sell at a specific price
B. The right to buy at a specific price
C. An obligation to buy at a certain price: B
A call gives the owner the right to call an asset away (buy it) from the seller
5. Arbitrage prevents:
A. market efficiency
B. Earning returns higher than the risk-free rate of return
C. two assets with identical payoffs from selling at different price: C
-Arbitrage forces two assets with the same expected future value to sell for the same current price. If
this were not the case you could simultaneously buy the cheaper asset and sell the more expensive
one for a guaranteed riskless profit
6. Derivatives are least likely to:
A. improve liquidity
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(Test 2)
1. Which of the following most accurately describes a derivative
security?
A. Always increase risk
B. Has no expiration date
C. Has a payoff based on an asset value or interest rate: C
-A derivatives value is derived from another asset or an interest rate
2. Which of the following statements about exchange-traded
derivatives is least accurate?
A. are liquid
B. are standardized contracts
C. carry significant default risk: C
-Exchange-traded derivatives have relatively low default risk because the clearinghouse stands
between the counter parties involved in most contracts
3. A custom agreement to purchase a specific T-bond next Thursday
for $1,000 is:
A. An option
B. A futures contract
C. A forward commitment: C
-This type of custom contract is a forward commitment
4. A call option is:
A. The right to sell at a specific price
B. The right to buy at a specific price
C. An obligation to buy at a certain price: B
A call gives the owner the right to call an asset away (buy it) from the seller
5. Arbitrage prevents:
A. market efficiency
B. Earning returns higher than the risk-free rate of return
C. two assets with identical payoffs from selling at different price: C
-Arbitrage forces two assets with the same expected future value to sell for the same current price. If
this were not the case you could simultaneously buy the cheaper asset and sell the more expensive
one for a guaranteed riskless profit
6. Derivatives are least likely to:
A. improve liquidity
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