QCM : Fundamentals of Futures, Options, and Arbitrage — 8 questions

Questions et réponses du QCM

1. When was the concept of market arbitrage opportunities first formally recognized or established in market theory?

In the 17th century during early financial markets
In the 21st century with electronic trading advancements
In the 20th century with the rise of modern finance
In the late 19th century with the development of arbitrage theory

In the late 19th century with the development of arbitrage theory

Explication

The concept of market arbitrage was first formally recognized and developed in the late 19th century, particularly with the formalization of arbitrage pricing theory and the efficient market hypothesis, which laid the foundation for understanding arbitrage opportunities in financial markets.

2. What is the primary function of risk management strategies involving derivatives?

To eliminate the need for physical inventory management
To offset potential losses by setting boundaries for key variables
To maximize potential profits regardless of market movements
To increase market volatility to attract more traders

To offset potential losses by setting boundaries for key variables

Explication

Risk management strategies using derivatives primarily serve to offset potential losses from adverse price movements by setting maximum or minimum values for key variables, thus protecting market participants from significant risks.

3. What is the effect on option prices when interest rates increase?

Both call and put options increase in value
Call options decrease in value and put options increase in value
Both call and put options decrease in value
Call options increase in value and put options decrease in value

Call options increase in value and put options decrease in value

Explication

An increase in interest rates raises the cost of carry, making call options more valuable because the opportunity cost of holding the underlying asset increases, while it decreases the value of put options due to higher financing costs and lower present value of the strike price.

4. Who formulated the Black-Scholes model for options valuation?

John C. Hull and Fischer Black
Robert Merton and Myron Scholes
Fischer Black and Myron Scholes
Paul Samuelson and Robert Merton

Fischer Black and Myron Scholes

Explication

Fischer Black and Myron Scholes jointly developed the Black-Scholes model, a fundamental framework for options pricing, in 1973. Robert Merton extended the model and contributed to its development, but the original formulation is credited to Black and Scholes. The other options include notable economists and finance experts, but they did not formulate this specific model.

5. How do the 'cost of carry' and 'convenience yield' differ in their impact on futures pricing?

The 'cost of carry' decreases futures prices, while 'convenience yield' increases them.
Both 'cost of carry' and 'convenience yield' increase futures prices.
Both 'cost of carry' and 'convenience yield' decrease futures prices.
The 'cost of carry' increases futures prices, while 'convenience yield' decreases them.

The 'cost of carry' decreases futures prices, while 'convenience yield' increases them.

Explication

The 'cost of carry' represents expenses that increase the futures price, such as storage and financing costs, whereas the 'convenience yield' reflects benefits of holding the physical commodity, which tend to decrease the futures price. Therefore, they have opposite effects, with the 'cost of carry' increasing and the 'convenience yield' decreasing futures prices.

6. What are futures and derivatives primarily used for in financial markets?

They are government bonds used to finance public projects.
They are insurance policies used to protect against personal risks.
They are financial instruments used mainly for risk management, speculation, and arbitrage.
They are types of stocks traded on exchanges to generate dividends.

They are financial instruments used mainly for risk management, speculation, and arbitrage.

Explication

Futures and derivatives are financial instruments that facilitate risk management, speculation, and arbitrage, allowing market participants to hedge against price movements, profit from expected changes, or exploit market inefficiencies.

7. How can a trader apply the Black-Scholes Model in practice to manage options positions?

Use it to determine the fair value of an option based on market data.
Use it to decide the exact timing of buying or selling stocks.
Use it to predict future stock prices with certainty.
Use it to calculate the dividend yield of the underlying asset.

Use it to determine the fair value of an option based on market data.

Explication

The Black-Scholes Model is used to estimate the theoretical fair value of options based on inputs like volatility, interest rates, and time to expiration. This helps traders and risk managers price options accurately and manage their positions effectively.

8. What is the ticker symbol for the SPDR Gold Trust ETF?

XLF
SLV
OLIK
GLD

GLD

Explication

GLD is the ticker symbol for the SPDR Gold Trust ETF, which provides exposure to gold prices.

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Futures — definition?

Standardized contracts to buy/sell at a future date.

Derivatives — role?

Facilitate risk management and speculation.

Equities — ownership?

Shares representing company ownership.

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