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Derivatives - Derivatives Section 2 Online Exam Quiz

Important questions about Derivatives - Derivatives Section 2. Derivatives - Derivatives Section 2 MCQ questions with answers. Derivatives - Derivatives Section 2 exam questions and answers for students and interviews.

1. Which of the following statements regarding the pricing of derivatives is most accurate?

Options

A : A hedge portfolio is formed that eliminates arbitrage opportunities.

B : The payoff of the underlying is adjusted upward by the derivative value.

C : The expected future payoff of the derivative is discounted at the risk-free rate plus a risk premium.

D :

2. Risk neutral investors:

Options

A : give away a risk premium because they enjoy taking risks.

B : expect a risk premium to compensate for the risk.

C : require no premium to compensate for assuming risk.

D :

3. Which of the following statements is least accurate?

Options

A : Clearinghouses restrict the transactions that can be arbitraged.

B : Pricing models show what the price of the derivative should be.

C : It may not always be possible to raise sufficient capital to engage in arbitrage.

D :

4. The interest rate used in the pricing of forward contracts:

Options

A : increases with the risk aversion of an investor.

B : decreases with the risk aversion of an investor.

C : is not impacted by the risk aversion of an investor.

D :

5. Which of the following statements about a forward contract is most accurate?

Options

A : The forward price is fixed at the start, and the value starts at zero and then changes.

B : The value is fixed at the start, and the forward price starts at zero and then changes.

C : The price determines the profit to the buyer and the value determines the profit to the seller.

D :

46. The value of a European option is least likely affected by:

Options

A : the volatility of the underlying.

B : dividends or interest paid by the underlying.

C : the percentage of the investor’s assets invested in the option.

D :

47. Which of the following factors will least likely reduce the value of a European call option?

Options

A : Less time to expiration.

B : A higher stock price relative to the exercise price.

C : Larger dividends paid by the stock during the life of the option.

D :

48. Analyst 1: A European put may be worthless the longer the time to expiration because the cost of waiting to receive the exercise price is higher. Analyst 2: A European put may be worthless the longer the time to expiration because the longer time to expiration means that that the put is more likely to expire out-of-the-money. Which analyst’s statement is most likely correct?

Options

A : Analyst 1.

B : Analyst 2.

C : Neither of them

D :

49. The value of a European put option on a dividend paying asset will most likely decrease if there is a:

Options

A : decrease in dividend payments.

B : decrease in carrying costs.

C : decrease in the risk free rate.

D :

50. What is the most likely impact on the price of a call option if the risk-free rate increases? The option price will:

Options

A : increase.

B : decrease.

C : stay the same.

D :

51. Assuming everything else constant, which of the following best describes changes that result in a decrease in the value of a put option?

Options

A : Option A in the above table.

B : Option B in the above table.

C : Option C in the above table.

D :

52. Which of the following will most likely cause a European put option to be worth less?

Options

A : Decrease in the risk free rate.

B : Decrease in the time to maturity.

C : Decrease in the price of the underlying.

D :

53. American and European call options are written on the same underlying and both options have the same expiration date and exercise price. At expiration:

Options

A : both will have the same value.

B : the American option will be worth more than the European option.

C : the American option will be worth less than the European option.

D :

54. At expiration, an American call option will be valuable if the underlying price is:

Options

A : equal to the exercise price.

B : less than the exercise price.

C : greater than the exercise price.

D :

55. According to put-call parity, which of the following relationships hold?

Options

A : The put price is always equal to the call price.

B : The put price minus the underlying price equals the call price minus the present value of the exercise price.

C : The put price plus the underlying price equals the call price plus the present value of the exercise price.

D :

56. Analyst 1: The combination of a long asset, long put, and short the call will result in a risk-free position. Analyst 2 : The combination of a long call, long put, and the short asset will result in a risk-free position. Which analyst’s statement is most likely correct?

Options

A : Analyst 1.

B : Analyst 2.

C : Both.

D :

57. Which of the following transactions is the equivalent of a synthetic long put position?

Options

A : Long call, short bond, long asset.

B : Short call, short bond, long asset.

C : Long call, long bond, short asset.

D :

58. According to put-call-forward parity, which of the following relationships hold?

Options

A : The put price plus the value of a risk-free bond with face value equal to the forward price equals the call price plus the value of a risk- free bond with face value equal to the exercise price.

B : The put price plus the value of a risk-free bond with face value equal to the exercise price equals the call price plus the value of a risk-free bond with face value equal to the forward price.

C : The put price plus the value of a risk-free bond with face value equal to the forward price equals the call price minus the value of a risk-free bond with face value equal to the exercise price.

D :

59. In a binomial model, the volatility of the underlying is directly represented by the:

Options

A : standard deviation of the underlying.

B : difference between the up and down factors.

C : ratio of the underlying value to the exercise price.

D :

60. Which of the following statements is most accurate? In a binomial model:

Options

A : the price of an option will be high if the actual probabilities of the up and down moves are high.

B : the price of an option will be low if the actual probabilities of the up and down moves are high.

C : the actual probabilities of the up and down moves are irrelevant to pricing options.

D :

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