Derivatives Flashcards
What is a derivative instrument?
A financial contract whose value is derived from the price of an underlying asset.
True or False: Derivatives can be used for hedging and speculation.
True
Fill in the blank: The two main categories of derivatives are _______ and _______.
exchange-traded derivatives; over-the-counter derivatives
What is an example of an exchange-traded derivative?
Futures contracts
What is an example of an over-the-counter derivative?
Swaps
Multiple Choice: Which of the following is NOT a type of derivative? A) Option B) Bond C) Future D) Swap
B) Bond
What does ‘hedging’ mean in the context of derivatives?
Reducing the risk of adverse price movements in an asset.
Define ‘futures contract’.
A standardized contract to buy or sell an asset at a predetermined price at a specified time in the future.
True or False: Over-the-counter derivatives are traded on a formal exchange.
False
What is the primary regulatory body for derivatives in the United States?
Commodity Futures Trading Commission (CFTC)
What is a ‘swap’?
A derivative contract in which two parties exchange cash flows or other financial instruments.
Multiple Choice: Which of the following is a characteristic of exchange-traded derivatives? A) Customizable B) Standardized C) Illiquid D) Unregulated
B) Standardized
What is the main advantage of using exchange-traded derivatives?
Increased transparency and reduced counterparty risk.
Fill in the blank: A _______ option gives the holder the right to buy an underlying asset.
call
What is a ‘put option’?
A financial contract that gives the holder the right to sell an underlying asset at a specified price before expiration.
True or False: Derivatives can only be used for speculation.
False
What is ‘margin’ in the context of derivatives trading?
Collateral that traders must deposit to cover potential losses.
What does ‘leverage’ mean in derivatives trading?
Using borrowed funds to increase the potential return on an investment.
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
D) All of the above
Define ‘options trading’.
The buying and selling of options contracts on underlying assets.
What is a ‘derivative market’?
A marketplace where derivatives are traded, including both exchange-traded and over-the-counter markets.
Fill in the blank: The process of offsetting a derivative position is known as _______.
closing
What is ‘counterparty risk’?
The risk that the other party in a transaction may default on their obligations.
True or False: All derivatives are considered high-risk investments.
False
What role do clearinghouses play in derivatives trading?
They act as intermediaries to facilitate transactions and reduce counterparty risk.
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
A) Risk management
