Forward Future and Option Contract Quiz

Explain the concept of a forward contract.

• A forward contract is a type of loan agreement between two parties

• A forward contract is a type of insurance policy for stocks

• A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

• A forward contract is a government-issued financial security

What are hedging strategies in the context of forward future and option contracts?

• Ways to increase risk in asset price movements

• Methods to predict asset price movements accurately

• Strategies to maximize profit in asset price movements

• Strategies to reduce risk in asset price movements

What are the key characteristics of a call option contract?

• The key characteristics of a call option contract include the right to buy an underlying asset at any price within a certain time frame

• The key characteristics of a call option contract include the obligation to buy an underlying asset at a specified price within a certain time frame

• The key characteristics of a call option contract include the right to sell an underlying asset at a specified price within a certain time frame

• The key characteristics of a call option contract include the right to buy an underlying asset at a specified price within a certain time frame, and the payment of a premium for this right.

How do forward contracts differ from futures contracts?

• Forward contracts are customized agreements between two parties, while futures contracts are standardized and traded on an exchange.

• Forward contracts are publicly traded, while futures contracts are private agreements.

• Forward contracts have fixed expiration dates, while futures contracts have flexible expiration dates.

• Forward contracts are settled in cash, while futures contracts are settled in physical delivery.

What are the different types of derivatives in the market?

• Stocks, bonds, and mutual funds

• Credit cards, loans, and mortgages

• Real estate, commodities, and cryptocurrencies

• Options, forwards, futures, and swaps

Explain the concept of hedging in the context of financial markets.

• Hedging is a risk management strategy used to offset potential losses in investments by taking an opposite position in a related asset.

• Hedging is only used in the context of personal finance, not in financial markets

• Hedging has no impact on potential losses in investments

• Hedging is a strategy to maximize potential losses in investments

What are the advantages of using call option contracts?

• They require the holder to own the asset before benefiting from price increases.

• They limit the potential profit for the holder.

• They are only beneficial when the asset's price decreases.

• They allow the holder to benefit from potential price increases without owning the asset.

What are the advantages of using put option contracts?

• They increase the potential for profit in a rising market.

• They are only suitable for short-term investments.

• They provide downside protection in a declining market.

• They have no impact on market fluctuations.

How do investors use derivatives for risk management?

• To increase potential losses

• To ignore potential losses

• To hedge against potential losses or to speculate on the price movements of underlying assets.

• To reduce potential gains

What are the key differences between hedging and speculation in financial markets?

• Hedging and speculation have no impact on reducing risk in financial markets

• Hedging and speculation are interchangeable terms in financial markets

• Hedging involves reducing risk, while speculation involves taking on risk

• Hedging and speculation both involve taking on high levels of risk