Derivatives MCQ - Derivatives Section 1

36 Which of the following statements about derivatives is least accurate?

Derivatives do not convey any information about the use of the underlying in strategies.

37 While responding to criticism that derivatives can be destabilizing to the market, an analyst makes the following statements:
Statement 1: Market crashes and panics have occurred since long before derivatives existed.
Statement 2: Derivatives are sufficiently regulated that they cannot destabilize the spot market.
Which statement is most likely correct?

Derivatives regulation is not more and is arguably less than spot market regulation. However, market crashes and panics have a very long history, much longer than that of derivatives.

38 Which of the following is most likely to be greater for derivative markets compared to underlying spot markets?

Derivative markets have greater liquidity than underlying spot markets with lower capital requirements and lower transaction costs.

39 Sebastian is planning to invest in derivatives. Which of the following is least likely to be an advantage that he should consider?

Derivative markets provide for effective risk management and thus result in payoffs different than those of the underlying. Therefore similar payoffs are least likely to be an advantage to consider. An operational advantage of derivative markets is the ease of going short in comparison to the underlying spot market.

40 The benefits of derivatives can result in a destabilizing consequence. Which of the following is this most likely to be?

The benefits of derivatives can result in excessive speculative trading and hence cause defaults on the part of creditors and speculators. A is incorrect because arbitrage tends to bring about a convergence of prices to the intrinsic value. B is incorrect because asymmetric information is not itself destabilizing.