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CHAPTER 1: INTRODUCTION
MULTIPLE CHOICE TEST QUESTIONS WITH ANSWERS
1. 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
2. Cash markets are also known as
a. speculative markets
b. spot markets
c. derivative markets
d. dollar markets
e. none of the above
3. 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
4. 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
5. 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
6. 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
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d. a risk-free transaction
e. none of the above
7. 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
8. 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
9. Options on futures are also known as
a. spot options
b. commodity options
c. exchange options
d. security options
e. none of the above
10. 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
11. Which of the following trade on organized exchanges?
a. caps
b. forwards
c. options
d. swaps
e. none of the above
12. Which of the following markets is/are said to provide price discovery?
a. futures
b. forwards
c. options
d. a and b
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e. b and c
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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
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CHAPTER 1: INTRODUCTION
MULTIPLE CHOICE TEST QUESTIONS WITH ANSWERS
1. 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
2. Cash markets are also known as
a. speculative markets
b. spot markets
c. derivative markets
d. dollar markets
e. none of the above
3. 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
4. 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
5. 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
6. 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
, ppppppp
d. a risk-free transaction
e. none of the above
7. 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
8. 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
9. Options on futures are also known as
a. spot options
b. commodity options
c. exchange options
d. security options
e. none of the above
10. 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
11. Which of the following trade on organized exchanges?
a. caps
b. forwards
c. options
d. swaps
e. none of the above
12. Which of the following markets is/are said to provide price discovery?
a. futures
b. forwards
c. options
d. a and b
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e. b and c
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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
