Podcast
Questions and Answers
Which of the following is NOT a type of derivative instrument?
Which of the following is NOT a type of derivative instrument?
- Forwards
- Bonds (correct)
- Futures
- Options
What is the primary purpose of hedging?
What is the primary purpose of hedging?
- To speculate on market movements
- To minimize risk (correct)
- To maximize profits
- To create synthetic exposure
Futures contracts are always traded on organized exchanges.
Futures contracts are always traded on organized exchanges.
True (A)
What is NOT a characteristic of forwards contracts?
What is NOT a characteristic of forwards contracts?
Which type of option gives the holder the right to sell the underlying asset at a predetermined price?
Which type of option gives the holder the right to sell the underlying asset at a predetermined price?
What are the three primary purposes of derivatives?
What are the three primary purposes of derivatives?
What type of spread involves options with the same expiration dates but different strike prices?
What type of spread involves options with the same expiration dates but different strike prices?
Derivatives are financial instruments that derive their value from an ______ asset.
Derivatives are financial instruments that derive their value from an ______ asset.
Which of the following is NOT a benefit of using derivatives for risk management?
Which of the following is NOT a benefit of using derivatives for risk management?
What are the two main types of risks that derivatives can magnify?
What are the two main types of risks that derivatives can magnify?
Arbitrage is a risk-free strategy that involves profiting from price discrepancies in different assets.
Arbitrage is a risk-free strategy that involves profiting from price discrepancies in different assets.
What is NOT a characteristic of futures contracts?
What is NOT a characteristic of futures contracts?
What is the primary difference between futures and forwards contracts?
What is the primary difference between futures and forwards contracts?
Derivatives always involve the physical exchange of the underlying asset.
Derivatives always involve the physical exchange of the underlying asset.
Which type of swap involves the exchange of one stream of future interest payments for another based on a pre-determined notional principal amount?
Which type of swap involves the exchange of one stream of future interest payments for another based on a pre-determined notional principal amount?
What are the two primary benefits of using derivatives for portfolio diversification?
What are the two primary benefits of using derivatives for portfolio diversification?
Derivatives can be used to create synthetic exposure to underlying assets without directly owning them.
Derivatives can be used to create synthetic exposure to underlying assets without directly owning them.
Which of the following is NOT a benefit of futures contracts for retail investors?
Which of the following is NOT a benefit of futures contracts for retail investors?
What are the two primary risks associated with using swaps?
What are the two primary risks associated with using swaps?
Options contracts always obligate the holder to buy or sell the underlying asset.
Options contracts always obligate the holder to buy or sell the underlying asset.
What type of derivative instrument is utilized to provide insurance against the default of a debt instrument?
What type of derivative instrument is utilized to provide insurance against the default of a debt instrument?
What is the primary benefit of using derivatives for capital efficiency?
What is the primary benefit of using derivatives for capital efficiency?
Derivatives are always a suitable investment strategy for all market participants.
Derivatives are always a suitable investment strategy for all market participants.
Flashcards
Derivative Instrument
Derivative Instrument
A contract between buyer and seller, whose value is based on the price of an underlying asset.
Underlying Asset
Underlying Asset
The asset whose price affects the value of the derivative contract (e.g., stocks, bonds, commodities).
Futures Contract
Futures Contract
A standardized agreement to buy or sell an asset at a set price on a future date.
Futures Exchange
Futures Exchange
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Daily Settlement
Daily Settlement
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Margin Account
Margin Account
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Hedging
Hedging
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Speculation
Speculation
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Arbitrage
Arbitrage
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Options contract
Options contract
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Calls
Calls
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Puts
Puts
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Study Notes
Module 5: Derivative Instruments
- Module 5 of the course covers derivative instruments
- The course is offered by Divine Word College of Calapan
- The team responsible for the module is Team Three-O
- Team members include: Aguilar, Tricia S.; Rayos, Crissthe! Mae D.; Remoquin, Kristine Joy A.
Table of Contents
- The module includes sections on introduction, learning objectives, discussion of main topics and subtopics, introduction to derivatives, purposes of derivatives, basic options strategies, risk management, conclusions, and references
- The topics also include futures, forwards, options, and swaps.
Learning Objectives/Outcomes
- Identify and describe the fundamental characteristics and functions of futures, forwards, options, and swaps
- Explain how derivatives are used, including hedging, speculation, and arbitrage, with practical examples
- Demonstrate the implementation of basic options strategies, including calls, puts, and spread trades
- Analyze how derivatives can be used to mitigate financial risks in various market conditions
Introduction
- Derivative instruments are essential in financial markets for managing risk and enhancing investment opportunities
- Their value is derived from underlying assets or indices
- Futures contracts obligate parties to transact an asset at a future date, options provide the right but not the obligation, swaps involve cash flow exchange
Futures and Forwards
- Futures contracts are standardized, traded on exchanges, and have fixed contract sizes and delivery dates
- Futures have daily settlements
- Forwards are customized and traded OTC
- Forward contracts don’t have daily settlements, have higher default risk.
Options
- Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price
- Call options provide the right to purchase an asset at a set price
- Put options provide the right to sell an asset at a set price
Features and Variants
- Options can be short-term or long-term, convertible securities, warrants, or rights offerings
Swaps
- Swaps are derivative contracts where two parties agree to exchange cash flows or financial obligations
- Examples types of swaps are interest rate swaps, currency swaps, commodity swaps, and credit default swaps (CDS)
Purposes of Derivatives
- Hedging to mitigate risk
- Speculation
- Arbitrage
Basic Option Strategies
- Options strategies like calls, puts, and spreads are used for leveraging market outlooks
- These strategies have characteristics and risks
Role of Derivatives in Risk Management
- Derivatives can be used to hedge against potential losses in underlying assets, interest rates, currency risks, and commodity price risks
- Derivatives can improve capital allocation, ease international flows, and diversify portfolios.
- Hedging is a strategy to minimize price risk
Conclusions
- Derivatives are crucial instruments in modern financial markets for managing risk, speculation, and arbitrage
- Includes futures, forwards, options, and swaps.
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