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Derivatives MCQ - Derivatives Section 2

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

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.

A hedge portfolio is formed that eliminates arbitrage opportunities and implies a unique price for the derivative.

2 Risk neutral investors:

Risk-neutral investors neither give nor receive a risk premium because they have no feelings about risk.

3 Which of the following statements is least accurate?

Clearing houses do not restrict arbitrage transactions.

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

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

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

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

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Question:

Which of the following statements is most accurate?

A. A swap is equivalent to a series of forward contracts, each created at the swap price.
B. A swap is equivalent to a series of long forward contracts, matched with short future contracts.
C. A swap is equivalent to a series of forward contracts, each created at their appropriate forward prices.

Correct answer: A

Explanation:

Each implicit forward contract is said to be off-market, because it is created at the swap price, not the appropriate forward price, which would be the price created…

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