Derivatives

What is a derivative?

• A type of physical asset like gold or real estate
  

• A financial instrument whose value is derived from an underlying assets

• A form of insurance against natural disasters

• A type of savings account

Tags

CCSS.8.EE.C.7B

Which of the following is NOT a type of derivative?

• Futures contract

• Options contract

• Swap contract

• Certificate of deposit (CD)

In a futures contract, what does the buyer agree to?

• Purchase an asset at a predetermined price at a future date

• Sell an asset at a current market price immediately

• Insure an asset against loss

• Lend money to the seller

What is the primary purpose of hedging in the derivatives market?

• Speculating for high returns

• Reducing the risk of price movements in an underlying asset

• Maximizing leverage for increased profits

• Avoiding regulatory scrutiny

Which market participant is primarily involved in taking speculative positions in derivatives?

• Hedger

• Arbitrageur

• Speculator

• Regulator

Which type of option gives the holder the right to sell the underlying asset?

• Call option

• Put option

• Swap option

• Convertible option

In a swap agreement, what do the two parties typically exchange?

• Commodities

• Different forms of interest payments

• Real estate properties

• Stock shares

Which of the following statements about derivatives is NOT true?

• Derivatives can be used to hedge against potential losses in the underlying asset.

• Derivatives are always traded on regulated exchanges.

• Derivatives are financial contracts whose value is derived from the value of an underlying asset, such as a stock, bond, or commodity.

• Options contracts give the buyer the right, but not the obligation, to buy or sell the underlying asset at a specific price by a certain date.

An investor believes the price of oil will increase in the future. They want to profit from this potential price rise. Which of the following derivatives contracts would be most appropriate for them to use?

• Put option

• Call option

• Forward contract

• Short futures contract

Which of the following best describes an 'option premium'?

• The difference between the strike price and the market price

• The fee charged by the exchange for trading options

• The cost paid by the buyer to the seller to acquire the option

• The potential profit from exercising the option