Module 9 - Introduction to Derivatives

Question 1

A _______ is a financial instrument whose value depends on the values of other, more basic underlying variables. Very often, the variables underlying these instruments are prices of traded assets.

Answer 1

derivative

Question 2

A _________ is an over-the-counter contract to buy or sell an asset at a future time for a certain price.

Answer 2

forward

Question 3

A _________ is an exchange traded contract buy or sell an asset at a future time for a certain price.

Answer 3

futures

Question 4

A _________ gives the holder the right (but not the obligation) to buy the underlying asset only at contract maturity for a certain price.

Answer 4

European call

Question 5

A ________ is exercised when the stock price at maturity is lower than the strike price.

Answer 5

European put

Question 6

The Black-Scholes price of a European call option on a stock depends on the following except
a. Underlying stock price

b. Underlying stock volatility
c. Strike price
d. Real-world expected return on the stock

Answer 6

Real-world expected return on the stock

Question 7

A trader or investor who takes advantage of some mispricing of assets in the market is doing

Answer 7

arbitrage

Question 8

A __________ is a contract between two parties wherein they may exchange cash flows from fixed-rate interest and floating-rate interest on the same principal and currency.

Answer 8

interest rate swap

Question 9

A swap contract is an exchange traded derivative instrument. This statement is

Answer 9

false

Question 10

Actual exchange of principal is done at the beginning of a swap. This statement is

Answer 10

true for a currency swap