Derivatives

Question 1

What is a derivative instrument?

Answer 1

A financial contract whose value is derived from the price of an underlying asset.

Question 2

True or False: Derivatives can be used for hedging and speculation.

Answer 2

True

Question 3

Fill in the blank: The two main categories of derivatives are _______ and _______.

Answer 3

exchange-traded derivatives; over-the-counter derivatives

Question 4

What is an example of an exchange-traded derivative?

Answer 4

Futures contracts

Question 5

What is an example of an over-the-counter derivative?

Answer 5

Swaps

Question 6

Multiple Choice: Which of the following is NOT a type of derivative? A) Option B) Bond C) Future D) Swap

Answer 6

B) Bond

Question 7

What does ‘hedging’ mean in the context of derivatives?

Answer 7

Reducing the risk of adverse price movements in an asset.

Question 8

Define ‘futures contract’.

Answer 8

A standardized contract to buy or sell an asset at a predetermined price at a specified time in the future.

Question 9

True or False: Over-the-counter derivatives are traded on a formal exchange.

Answer 9

False

Question 10

What is the primary regulatory body for derivatives in the United States?

Answer 10

Commodity Futures Trading Commission (CFTC)

Question 11

What is a ‘swap’?

Answer 11

A derivative contract in which two parties exchange cash flows or other financial instruments.

Question 12

Multiple Choice: Which of the following is a characteristic of exchange-traded derivatives? A) Customizable B) Standardized C) Illiquid D) Unregulated

Answer 12

B) Standardized

Question 13

What is the main advantage of using exchange-traded derivatives?

Answer 13

Increased transparency and reduced counterparty risk.

Question 14

Fill in the blank: A _______ option gives the holder the right to buy an underlying asset.

Answer 14

call

Question 15

What is a ‘put option’?

Answer 15

A financial contract that gives the holder the right to sell an underlying asset at a specified price before expiration.

Question 16

True or False: Derivatives can only be used for speculation.

Answer 16

False

Question 17

What is ‘margin’ in the context of derivatives trading?

Answer 17

Collateral that traders must deposit to cover potential losses.

Question 18

What does ‘leverage’ mean in derivatives trading?

Answer 18

Using borrowed funds to increase the potential return on an investment.

Question 19

Multiple Choice: Which of the following is a risk of trading derivatives? A) Market risk B) Credit risk C) Liquidity risk D) All of the above

Answer 19

D) All of the above

Question 20

Define ‘options trading’.

Answer 20

The buying and selling of options contracts on underlying assets.

Question 21

What is a ‘derivative market’?

Answer 21

A marketplace where derivatives are traded, including both exchange-traded and over-the-counter markets.

Question 22

Fill in the blank: The process of offsetting a derivative position is known as _______.

Answer 22

closing

Question 23

What is ‘counterparty risk’?

Answer 23

The risk that the other party in a transaction may default on their obligations.

Question 24

True or False: All derivatives are considered high-risk investments.

Answer 24

False

Question 25

What role do clearinghouses play in derivatives trading?

Answer 25

They act as intermediaries to facilitate transactions and reduce counterparty risk.

Question 26

Multiple Choice: Which of the following is a common use of derivatives? A) Risk management B) Tax evasion C) Illegal trading D) None of the above

Answer 26

A) Risk management