CHAPTER 1: INTRODUCTION

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CHAPTER 1: INTRODUCTION

MULTIPLE CHOICE TEST QUESTIONS

• The market value of the derivatives contracts worldwide totals
• less than a trillion dollars
• in the hundreds of trillion dollars
• over a trillion dollars but less than a hundred trillion
• over quadrillion dollars
• none of the above

• Cash markets are also known as
• speculative markets
• spot markets
• derivative markets
• dollar markets
• none of the above

• A call option gives the holder
• the right to buy something
• the right to sell something
• the obligation to buy something
• the obligation to sell something
• none of the above

• Which of the following instruments are contracts but are not securities
• stocks
• options
• swaps
• a and b
• b and c

• The positive relationship between risk and return is called
• expected return
• market efficiency
• the law of one price
• arbitrage
• none of the above

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

call is

• a gamble
• a speculative position
• a hedge
• a risk-free transaction
• none of the above

• Which of the following are advantages of derivatives?
• lower transaction costs than securities and commodities
• reveal information about expected prices and volatility
• help control risk
• make spot prices stay closer to their true values

(Introduction to Derivatives and Risk Management, 10e Don Chance, Robert Brooks) (Test Bank, Answer at the end of this File) 1 / 4

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• all of the above

• A forward contract has which of the following characteristics?
• has a buyer and a seller
• trades on an organized exchange
• has a daily settlement
• gives the right but not the obligation to buy
• all of the above

• Options on futures are also known as
• spot options
• commodity options
• exchange options
• security options
• none of the above

• A market in which the price equals the true economic value
• is risk-free
• has high expected returns
• is organized
• is efficient
• all of the above

• Which of the following trade on organized exchanges?
• caps
• forwards
• options
• swaps
• none of the above

• Which of the following markets is/are said to provide price discovery?
• futures
• forwards
• options
• a and b
• b and c

• Investors who do not consider risk in their decisions are said to be
• speculating
• short selling
• risk neutral
• traders
• none of the above

• Which of the following statements is not true about the law of one price
• investors prefer more wealth to less
• investments that offer the same return in all states must pay the risk-free rate
• if two investment opportunities offer equivalent outcomes, they must have the same price
• investors are risk neutral
• none of the above

• Which of the following contracts obligates a buyer to buy or sell something at a later date? 2 / 4

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• call
• futures
• cap
• put
• swaption

• The process of creating new financial products is sometimes referred to as
• financial frontiering
• financial engineering
• financial modeling
• financial innovation
• none of the above

• The process of selling borrowed assets with the intention of buying them back at a later date and lower

price is referred to as

• longing an asset
• asset flipping
• shorting
• anticipated price fall arbitrage
• none of the above

• 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.

• repurchase agreement
• short selling
• swap
• call
• none of the above

• The expected return minus the risk-free rate is called
• the risk premium
• the percentage return
• the asset’s beta
• the return premium
• none of the above

• 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?

• return-to-equilibrium transaction
• risk-assuming transaction
• speculative transaction
• arbitrage transaction
• none of the above 3 / 4

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149

CHAPTER 1: INTRODUCTION

TRUE/FALSE TEST QUESTIONS

T F 1. Options, forwards, swaps, and futures are financial assets.

T F 2. The absence of a daily settlement is one of the factors distinguishing a forward contract from a futures contract.

T F 3. A risk premium is the additional return investors expect for assuming risk.

T F 4. Arbitrage is a transaction designed to capture profits resulting from market efficiency.

T F 5. Derivatives permit investors to manage their risk more efficiently.

T F 6. The law of one price states that the price of an asset cannot change.

T F 7. Lower transaction costs are one advantage of derivative markets.

T F 8. Derivative markets make stock and bond markets more efficient.

T F 9. Speculation is equivalent to gambling.

T F 10. Most derivative contracts terminate with delivery of the underlying asset.

T F 11. Swaps, like options, trade on organized exchanges.

T F 12. Storing an asset entails risk.

T F 13. The theoretical fair value is the only value an asset can have.

T F 14. Short selling is a high risk activity.

T F 15. Uncertainty of future sales and cost of inputs are examples of financial risks businesses may face.

T F 16. Exchange-traded derivatives volume is less than one billion according to the Futures Industry magazine in 2010.

T F 17. Derivatives are securities and not contracts.

T F 18. A call option on a futures contract gives the buyer the right to buy a futures contract.

T F 19. A seller of a put option on a futures contract obligates them to buy a futures contract should the put buyer exercise the option.

T F 20. Swaps obligate delivery of either bonds or stocks.

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