Derivatives

Question 1

What is a derivative?

Answer 1

A financial asset that derives it’s value from the performamce of another asset. This other asset is called an underlying asset. They are created by writers and sold to buyers

Question 2

Give 6 examples of things that could be underlying asset’s to a derivative.

Answer 2

-Commodities
-Shares
-Share inidices
-Bonds
-Currencies
-Interest rates

Question 3

What is the relationship between derivatives and their underlying asset?

Answer 3

When the value of the underlying asset goes up, the value of the derivative goes up. When the value of the underlying asset goes down, the value of the derivative goes down.

Question 4

??? explain changes in derivative value???

Question 5

What are option derivatives?

Answer 5

Derivatives that give the holder the right, but not the obligation, to buy or sell an asset at or before a given date.

Question 6

Name and explain the 2 types of derivatives.

Answer 6

Call options - gives the holder the right to buy the underlying asset at or before a given date

Put options - gives the holder the right to sell the underlying asset at or before a given date