Lesson 4.1: What Are Derivatives? Flashcards
Standardized equity options are issued by:
The Options Clearing Corporation (OCC)
Standardized equity options are issued and guaranteed by the OCC. They are traded on the CBOE and other exchanges. The issuer of the underlying stock is not involved in any way.
What would be considered derivatives?
A) Futures contracts
B) Forward contracts
C) Equity options
An exchange-traded fund (ETF) is an investment company, regardless of what is contained in its portfolio. Forwards, futures, and equity options are derivatives.
The term derivative would not apply to which of the following?
A) Futures
B) Forwards
C) REITs
D) Warrants
C) REITs
REITs are not based on the value of something other than their own assets. Warrants (and rights) derive their value from the underlying security. Futures and forwards are contracts whose value is based on some underlying asset.
Which of the following financial instruments is not a derivative?
A) A call option
B) A put option
C) LEAPS
D) A share of stock
D) A share of stock
A derivative is a type of financial instrument that derives its value from another asset or combination of assets. The best known examples of derivatives are options, of which puts, calls, and LEAPS are examples.
A financial instrument whose value depends upon the value of another asset is known as:
The definition of a derivative is that its value is based on some underlying asset. Included in the term are options, forwards, futures, and convertible securities. Some derivatives are securities, such as options on stock, while others such as forwards and futures contracts are specifically excluded from the definition of a security.
Which of the following is not considered a derivative?
A) Unit investment trust
B) Futures contract
C) Call option
D) Warrant
A) Unit investment trust
All of the other choices “derive” their value from some underlying asset. A UIT is an investment company, and its value is based on its own assets.
Standardized equity options are issued and guaranteed by:
The Options Clearing Corporation (OCC)
The OCC has the role of issuer and guarantor of all standardized equity options. That means if one party to an options contract fails to perform, the OCC steps in and takes that role (and then goes after the recalcitrant party).
The term derivative would apply to all of the following except
A) futures
B) hedge funds
C) forwards
D) options
Hedge funds are pooled investments, a form of investment company, and are not derivatives as are the other three choices. This is an example of a question where you get the correct answer by knowing the other three choices are not the exception.
