Derivatives

Financial derivatives include

• Stock

• Bond

• Futures

• None of them

Which of the following is not a financial derivative?

• Stock

• Futures

• Options

• Forward contracts

Which of the following is a reason to hedge a portfolio?

• To increase the probability of gains

• To limit exposure to risk

• To profit from capital gains when interest rates fall.

• all of them

A contract that requires the investor to buy securities on a future date is called a

• short contract

• Long contract

• Hedge

• Cross

disadvantage of a forward contract is that

• it may be difficult to locate a counterparty

• the forward market suffers from lack of liquidity

• these contracts have default risk

• all of them

Forward contracts are risky because they

• are subject to lack of liquidity

• hedge a portfolio

• Traded on the exchange

• are standardized

On the expiration date of a futures contract, the price of the contract

• always equals the purchase price of the contract

• always equals the average price over the life of the contract

• always equals the price of the underlying asset

• cannot be determined

Futures differ from forwards because they are

• used to hedge portfolios

• used to hedge individual securities

• used in both financial and foreign exchange markets

• a standardized contract

Futures differ from forwards because they are

• used to hedge portfolios

• marked to market daily

• used in both financial and foreign exchange markets

• used to hedge individual securities

Options are contracts that give the purchasers the

• the right to hold an underlying asset

• option to buy or sell an underlying asset

• the right to switch payment streams

• the obligation to buy or sell an underlying asset