Derivatives

Question 1

derivatives?

Answer 1

contracts / promises regarding the trade of a security

Question 2

are derivatives a form of betting/gambling?

Answer 2

yes, because both parties are making the deal with the prediction a certain outcome will occur that will result in favourable payoffs

Question 3

4 most common types of derivatives?

Answer 3

forwards
futures
options
swaps

Question 4

financial derivative?

Answer 4

any security whose value is determined by or derived from the value of another asset

Question 5

underlying asset?

Answer 5

asset that the derivative’s value depends on

Question 6

purposes of derivatives?

Answer 6

1. to hedge risks (minimise risks)
2. speculating on derivatives

Question 7

how do derivatives hedge risks?

Answer 7

protects one of the parties if price fluctuates

Question 8

speculation with derivatives?

Answer 8

derivative speculators are motivated by profit seeking

speculators are driven by the opportunity to profit from an uncertain future event

Question 9

forward contracts?

Answer 9

customised contract between 2 parties to buy or sell an asset at a specified price at a specific future date

Question 10

futures contracts?

Answer 10

like forwards, but are standardised and regulated

Question 11

options contracts?

Answer 11

a contract that gives the right but not the obligation to buy (call) or sell (put) a security or other financial asset

Question 12

swaps contracts?

Answer 12

the exchange of one security in return for another

Question 13

call option?

Answer 13

option to buy a security

Question 14

put option?

Answer 14

option to sell a security