Derivatives

Derivatives can be characterized as high-cost tools, which can reduce risk by hedging.

• True

• False

‘Hedgers’ are:

• those who believe what the next price movement is and back their judgement with money.

• those who will lose money from a given price movement and seek to protect themselves from this.

• those who perceive pricing anomalies and seek to exploit this.

• All answers are incorrect.

Stock options are:

• options on individual stock.

• option contracts on financial futures.

• financial contracts that obligate each party to the contract to exchange a set of payments it owns for another set of payments owned by the other party.

• the focal point for derivative transactions.

 

Futures contract is a commitment to buy or sell a given quantity of an underlying product by a given date in the future at a price agreed now.

• True

• False

Choose the correct sentence:

• Futures are similar to forward, but usually there is no intention to take or make delivery.

• Futures is for those who want the physical commodity.

• Forward is for those who are speculating or hedging and are happy with cash settlement.

• All answers are correct.

If it is an option to buy the future, the option holder finds himself the buyer of the futures contract.

• True

• False

Interest rate swaps involve the exchange of one set of interest payments for another set of interest payments, all denominated in the different currencies.

• True

• False

The most common type of interest-rate swap (called plain vanilla swap) specifies:

• The interest rate on the payments that are being exchanged.

• The type of interest payments (variable or fixed rate).

• The amount of notional principal, which is the amount on which the interest is being paid.

• All answers are correct.

In a credit swap transaction risky payments on loans are swapped between two banks.

• True

• False