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Questions and Answers
What determines the price of a derivative contract?
What determines the price of a derivative contract?
- Global economic indicators
- Current stock market performance
- Government regulations on derivative trading
- Specified underlying commodity or financial instrument traded in the physical markets (correct)
What is the basic principle behind using a derivative product to manage an identified risk exposure?
What is the basic principle behind using a derivative product to manage an identified risk exposure?
- Guaranteeing profits in the physical markets
- Speculating on future price movements
- Minimizing the impact of market fluctuations
- Locking in a price today that will apply at a specified future date (correct)
How does the value of derivative contracts change with market movements?
How does the value of derivative contracts change with market movements?
- It moves in alignment with commodity prices, interest rates, exchange rates, or share market prices (correct)
- It remains constant regardless of market movements
- It is determined solely by government policies
- It moves opposite to market fluctuations
Which of the following is an example of a derivative product based on a commodity?
Which of the following is an example of a derivative product based on a commodity?
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Which of the following is NOT a generic derivative product?
Which of the following is NOT a generic derivative product?
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Study Notes
Determinants of Derivative Contract Price
- The price of a derivative contract is determined by various factors, including the underlying asset's price, interest rates, volatility, and time to expiration.
Risk Management with Derivative Products
- The basic principle behind using a derivative product to manage an identified risk exposure is to hedge against potential losses by taking an opposite position in the derivative market.
Derivative Contract Value and Market Movements
- The value of derivative contracts changes with market movements, such as changes in the underlying asset's price, interest rates, and volatility.
Commodity-Based Derivative Products
- Futures contracts on commodities, such as wheat, oil, or gold, are examples of derivative products based on a commodity.
Types of Derivative Products
- Options and futures are generic derivative products.
- Stocks and bonds are not derivative products, as they are direct investments in a company or debt obligation.
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