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LOS a: Define a derivative and differentiate between exchange-traded and over-the-counter derivatives. ffice ffice" />
Q1. Over-the- counter derivatives:
A) have good liquidity in the over-the-counter (OTC) market.
B) are customized contracts.
C) are backed by the OTC Clearinghouse.
Correct answer is B)
OTC derivative contracts (securities) are customized and have poor liquidity. The contract is with a specific counterparty and there is default risk since there is no clearinghouse to guarantee performance.
Q2. Which of the following is NOT an over-the-counter (OTC) derivative?
A) A forward contract.
B) A futures contract.
C) A bond option.
Correct answer is B)
Futures contracts are exchange-traded; forwards and most bond options are OTC derivatives.
Q3. Which of the following definitions involving derivatives is least accurate?
A) A call option gives the owner the right to sell the underlying good at a specific price for a specified time period.
B) An option writer is the seller of an option.
C) An arbitrage opportunity is the chance to make a riskless profit with no investment.
Correct answer is A)
A call option gives the owner the right to buy the underlying good at a specific price for a specified time period.
Q4. A derivative security:
A) has a value based on another security or index.
B) has no default risk.
C) has a value based on stock prices.
Correct answer is A)
This is the definition of a derivative security. Those based on stock prices are equity derivatives.
Q5. A financial instrument that has payoffs based on the price of an underlying physical or financial asset is a(n):
A) option.
B) derivative security.
C) future.
Correct answer is B)
Options and futures are examples of types of derivative securities.
Q6. A derivative security:
A) is like a callable bond.
B) has a value dependent on the shape of the yield curve.
C) is one that is based on the value of another security.
Correct answer is C)
A derivative security is one that ‘derives’ its value from that of another security.
Q7. Which of the following statements regarding exchange-traded derivatives is FALSE? Exchange-traded derivatives:
A) often trade in a physical location.
B) are illiquid.
C) are standardized contracts.
Correct answer is B)
Derivatives that trade on exchanges have good liquidity in most cases. They have the other characteristics listed.
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发表于 2009-3-2 09:23
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