Introduction to Financial Derivatives Ch 1

What is a financial derivative?

• A physical asset like gold or oil

• A type of equity security

• A contract whose value is based on the performance of an underlying asset

• A fixed deposit product in a bank

Which of the following is NOT a type of financial derivative?

• Options

• Futures

• Bonds

• Swaps

What is the primary purpose of using derivatives?

• Increasing interest rates

• Hedging risk

• Issuing shares

• Increasing cash reserves

A futures contract obligates the buyer to:

• Pay dividends

• Exchange currencies at current rates

• Buy or sell an asset at a predetermined price on a specified date

• Only buy the underlying asset if the price goes up

What is the main difference between options and futures contracts?

• Futures are optional, options are mandatory

• Options give the right, not the obligation, to buy/sell; futures are obligatory

• Futures have premiums, options do not

• Options only apply to stocks

In a put option, the buyer has the right to:

• Buy the underlying asset at a set price

• Sell the underlying asset at a set price

• Avoid all market risks

• Receive dividends

What is the underlying asset in a derivative contract?

• The principal investment of the derivative

• The security or commodity on which the derivative is based

• The broker who facilitates the trade

• The bank that issues the derivative

Which of the following is a use of derivatives in portfolio management?

• Paying taxes

• Increasing transaction fees

• Hedging against market volatility

• Recording business expenses

A swap contract is typically used to:

• Exchange stock options between two parties

• Trade futures on a commodities exchange

• Exchange cash flows based on different financial instruments

• Sell real estate derivatives

Which market are standardized derivative contracts like futures traded on?

• Over-the-counter (OTC) market

• Secondary bond market

• Stock exchange

• Exchange-traded markets