Derivatives - Derivatives Section 1
41. Compared to the underlying spot market, the derivatives market is least likely to have:
- Option : A
- Explanation : Compared to the underlying spot market, the derivatives market will have higher liquidity.
- Option : C
- Explanation : Derivatives can be combined with other derivatives or underlying assets to form hybrids. Derivatives can be issued on a variety of such diverse underlyings such as weather, electricity, and disaster claims.
43. Arbitrage is often referred to as the:
- Option : A
- Explanation : Arbitrage forces equivalent assets to have a single price. There is nothing called the law of similar prices or the law of limited profitability.
44. When an arbitrage opportunity exists, the combined action of all arbitrageurs:
- Option : C
- Explanation : Prices converge because of the heavy demand for the cheaper asset and the heavy supply of the more expensive asset.
- Option : A
- Explanation : Arbitrage is risk-free and requires no capital because selling the overpriced asset produces the funds to buy the underpriced asset.
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