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Derivatives - 0/4
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Questions in this quiz (64)
1A derivative is best described as a financial instrument that derives its performance by:
- Apassing through the returns of the underlying.
- Breplicating the performance of the underlying.
- Ctransforming the performance of the underlying.
2Compared with exchange-traded derivatives, over-the-counter derivatives would most likely be described as:
- Astandardized.
- Bless transparent.
- Cmore transparent.
3Exchange-traded derivatives are:
- Alargely unregulated.
- Btraded through an informal network.
- Cguaranteed by a clearinghouse against default.
4Which of the following derivatives is classified as a contingent claim?
- AFutures contracts
- BInterest rate swaps
- CCredit default swaps
5In contrast to contingent claims, forward commitments provide the:
- Aright to buy or sell the underlying asset in the future.
- Bobligation to buy or sell the underlying asset in the future.
- Cpromise to provide credit protection in the event of default.
6Which of the following derivatives provide payoffs that are non-linearly related to the payoffs of the underlying?
- AOptions
- BForwards
- CInterest-rate swaps
7An interest rate swap is a derivative contract in which:
- Atwo parties agree to exchange a series of cash flows.
- Bthe credit seller provides protection to the credit buyer.
- Cthe buyer has the right to purchase the underlying from the seller.
8Forward commitments subject to default are:
- Aforwards and futures.
- Bfutures and interest rate swaps.
- Cinterest rate swaps and forwards.
9Which of the following derivatives is least likely to have a value of zero at initiation of the contract?
- AFutures
- BOptions
- CForwards
10A credit derivative is a derivative contract in which the:
- Aclearinghouse provides a credit guarantee to both the buyer and the seller.
- Bseller provides protection to the buyer against the credit risk of a third party.
- Cthe buyer and seller provide a performance bond at initiation of the contract.
11Compared with the underlying spot market, derivative markets are more likely to have:
- Agreater liquidity.
- Bhigher transaction costs.
- Chigher capital requirements.
12Which of the following characteristics is least likely to be a benefit associated with using derivatives?
- AMore effective management of risk
- BPayoffs similar to those associated with the underlying
- CGreater opportunities to go short compared with the spot market
13Which of the following is most likely to be a destabilizing consequence of speculation using derivatives?
- AIncreased defaults by speculators and creditors
- BMarket price swings resulting from arbitrage activities
- CThe creation of trading strategies that result in asymmetric performance
14The law of one price is best described as:
- Athe true fundamental value of an asset.
- Bearning a risk-free profit without committing any capital.
- Ctwo assets that will produce the same cash flows in the future must sell for equivalent prices.
15Arbitrage opportunities exist when:
- Atwo identical assets or derivatives sell for different prices.
- Bcombinations of the underlying asset and a derivative earn the risk-free rate.
- Carbitrageurs simultaneously buy takeover targets and sell takeover acquirers.
16An arbitrage opportunity is least likely to be exploited when:
- Aone position is illiquid.
- Bthe price differential between assets is large.
- Cthe investor can execute a transaction in large volumes.
17An arbitrageur will most likely execute a trade when:
- Atransaction costs are low.
- Bcosts of short-selling are high.
- Cprices are consistent with the law of one price.
18An arbitrage transaction generates a net inflow of funds:
- Athroughout the holding period.
- Bat the end of the holding period.
- Cat the start of the holding period.
19The price of a forward contract:
- Ais the amount paid at initiation.
- Bis the amount paid at expiration.
- Cfluctuates over the term of the contract.
20Assume an asset pays no dividends or interest, and also assume that the asset does not yield any non-financial benefits or incur any carrying cost. At initiation, the price of a forward contract on that asset is:
- Alower than the value of the contract.
- Bequal to the value of the contract.
- Cgreater than the value of the contract.
21With respect to a forward contract, as market conditions change:
- Aonly the price fluctuates.
- Bonly the value fluctuates.
- Cboth the price and the value fluctuate.
22The value of a forward contract at expiration is:
- Apositive to the long party if the spot price is higher than the forward price.
- Bnegative to the short party if the forward price is higher than the spot price.
- Cpositive to the short party if the spot price is higher than the forward price.
23At the initiation of a forward contract on an asset that neither receives benefits nor incurs carrying costs during the term of the contract, the forward price is equal to the:
- Aspot price.
- Bfuture value of the spot price.
- Cpresent value of the spot price.
24Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year, stock BWQ is expected to generate significant benefits whereas stock ZER is not expected to generate any benefits. There are no carrying costs associated with holding either stock over the next year. Compared with ZER, the one-year forward price of BWQ is most likely:
- Alower.
- Bthe same.
- Chigher.
25If the net cost of carry of an asset is positive, then the price of a forward contract on that asset is most likely:
- Alower than if the net cost of carry was zero.
- Bthe same as if the net cost of carry was zero.
- Chigher than if the net cost of carry was zero.
26If the present value of storage costs exceeds the present value of its convenience yield, then the commodity’s forward price is most likely:
- Aless than the spot price compounded at the risk-free rate.
- Bthe same as the spot price compounded at the risk-free rate.
- Chigher than the spot price compounded at the risk-free rate.
27Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price?
- AOpportunity cost
- BLack of dividends
- CConvenience yield
28When interest rates are constant, futures prices are most likely:
- Aless than forward prices.
- Bequal to forward prices.
- Cgreater than forward prices.
29In contrast to a forward contract, a futures contract:
- Atrades over-the-counter.
- Bis initiated at a zero value.
- Cis marked-to-market daily.
30To the holder of a long position, it is more desirable to own a forward contract than a futures contract when interest rates and futures prices are:
- Anegatively correlated.
- Buncorrelated.
- Cpositively correlated.
31The value of a swap typically:
- Ais non-zero at initiation.
- Bis obtained through replication.
- Cdoes not fluctuate over the life of the contract.
32The price of a swap typically:
- Ais zero at initiation.
- Bfluctuates over the life of the contract.
- Cis obtained through a process of replication.
33The value of a swap is equal to the present value of the:
- Afixed payments from the swap.
- Bnet cash flow payments from the swap.
- Cunderlying at the end of the contract.
34A European call option and a European put option are written on the same underlying, and both options have the same expiration date and exercise price. At expiration, it is possible that both options will have:
- Anegative values.
- Bthe same value.
- Cpositive values.
35At expiration, a European put option will be valuable if the exercise price is:
- Aless than the underlying price.
- Bequal to the underlying price.
- Cgreater than the underlying price.
36The value of a European call option at expiration is the greater of zero or the:
- Avalue of the underlying.
- Bvalue of the underlying minus the exercise price.
- Cexercise price minus the value of the underlying.
37For a European call option with two months until expiration, if the spot price is below the exercise price, the call option will most likely have:
- Azero time value.
- Bpositive time value.
- Cpositive exercise value.
38When the price of the underlying is below the exercise price, a put option is:
- Ain-the-money.
- Bat-the-money.
- Cout-of-the-money.
39If the risk-free rate increases, the value of an in-the-money European put option will most likely:
- Adecrease.
- Bremain the same.
- Cincrease.
40The value of a European call option is inversely related to the:
- Aexercise price.
- Btime to expiration.
- Cvolatility of the underlying.
41The information below shows three European call options on the same underlying:
Time to Expiration Exercise Price
Option 1 3 months $100
Option 2 6 months $100
Option 3 6 months $105
The option with the highest value is most likely:- AOption 1.
- BOption 2.
- COption 3.
42The value of a European put option can be either directly or inversely related to the:
- Aexercise price.
- Btime to expiration
- Cvolatility of the underlying.
43Prior to expiration, the lowest value of a European put option is the greater of zero or the:
- Aexercise price minus the value of the underlying.
- Bpresent value of the exercise price minus the value of the underlying.
- Cvalue of the underlying minus the present value of the exercise price.
44A European put option on a dividend-paying stock is most likely to increase if there is an increase in:
- Acarrying costs.
- Bthe risk-free rate.
- Cdividend payments.
45Based on put-call parity, a trader who combines a long asset, a long put, and a short call will create a synthetic:
- Along bond.
- Bfiduciary call.
- Cprotective put.
46Which of the following transactions is the equivalent of a synthetic long call position?
- ALong asset, long put, short call
- BLong asset, long put, short bond
- CShort asset, long call, long bond
47Which of the following is least likely to be required by the binomial option pricing model?
- ASpot price
- BTwo possible prices one period later
- CActual probabilities of the up and down moves
48An at-the-money American call option on a stock that pays no dividends has three months remaining until expiration. The market value of the option will most likely be:
- Aless than its exercise value.
- Bequal to its exercise value.
- Cgreater than its exercise value.
49At expiration, American call options are worth:
- Aless than European call options.
- Bthe same as European call options.
- Cmore than European call options.
50Which of the following circumstances will most likely affect the value of an American call option relative to a European call option?
- ADividends are declared
- BExpiration date occurs
- CThe risk-free rate changes
51Combining a protective put with a forward contract generates equivalent outcomes at expiration to those of a:
- Afiduciary call.
- Blong call combined with a short asset.
- Cforward contract combined with a risk-free bond.
52If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation:
- Avalue exceeds price.
- Bprice exceeds value.
- Cprice is equal to value.
53A forward rate agreement most likely differs from most other forward contracts because:
- Apositions cannot be closed out prior to maturity.
- Bit involves an option component.
- Cits underlying is not an asset.
54The pricing of forwards and futures will most likely differ if:
- Ainterest rates exhibit zero volatility.
- Bfutures prices and interest rates are negatively correlated
- Cfutures prices and interest rates are uncorrelated.
55The price of an interest rate swap that involves the exchange of a fixed payment
for a floating payment is most likely:- Aequal to its value at expiration.
- Bset at initiation and constant over time.
- Caffected by changes in the floating payment.
56Using put–call parity, a long call can best be replicated by going:
- Along the put, short the asset, and long the bond.
- Bshort the put, long the asset, and short the bond.
- Clong the put, long the asset, and short the bond.
57For a call option, if the underlying asset’s value is less than the option’s exercise price, the option is said to be:
- Aat the money
- Bout of the money
- Cin the money.
58The value of a long position in a forward contract at expiration is best defined as:
- Aforward price agreed in the contract minus spot price of the underlying.
- Bspot price of the underlying minus forward price agreed in the contract.
- Cvalue of the forward at initiation minus spot price of the underlying.
59Convenience yield is best described as a nonmonetary benefit of holding a(n):
- Aoption contract.
- Basset.
- Cforward contract.
60A swap that involves the exchange of a fixed payment for a floating payment is most likely equivalent to a series of:
- Aoff-market forward contracts.
- Bforward contracts that all have an initial positive value.
- Cforward contracts that all have an initial value equal to the fixed payment.
61Exercise of a European put option is most likely justified if:
- Athe option is out of the money.
- Bthe exercise price exceeds the value of the underlying.
- Cthe exercise value is negative.
62At expiration, an option that is in the money will most likely have:
- Atime value, but no exercise value.
- Bexercise value, but no time value.
- Cboth time value and exercise value.
63For a stock that pays no dividends, the value of an American call option is most likely:
- Athe same as the value of a European call option with otherwise identical features.
- Bgreater than the value of a European call option with otherwise identical features.
- Cless than the value of a European call option with otherwise identical features.
64Which of the following attributes is least likely to be a requirement for the existence of riskless arbitrage? The underlying security:
- Acan be sold short.
- Bis a financial asset.
- Cis relatively liquid.
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- CFA Finance Quiz on Derivatives - 0/4, created by Alan Carlson on 11/05/2019.
- Author
- Alan Carlson
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- Created on 11 May 2019 · updated on 25 May 2019
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