Derivatives and Forward Commitments Quiz

The concept of a derivative refers to the rate of change of a function at a specific point.

Exchange-traded derivatives are standardized contracts that are traded on organized exchanges, whereas over-the-counter derivatives are privately negotiated contracts between two parties.

A forward commitment is an agreement to engage in a future transaction. The different types of forward commitments include forward contracts, futures contracts, and swaps.

<p>Contingent claims are financial contracts whose value depends on the occurrence of a specific event. The different types of contingent claims include options to buy and options to sell.</p> Signup and view all the answers

<p>Arbitrage refers to the practice of taking advantage of price differences in different markets to make riskless profits. It plays a role in determining prices and promoting market efficiency by eliminating any potential for price discrepancies.</p> Signup and view all the answers

<p>Derivative = A financial instrument whose value is dependent upon or derived from an underlying asset or group of assets Forward Commitment = An agreement between two parties to conduct a transaction at a specified, future date Contingent Claim = A claim that depends on a particular event to occur in the future Arbitrage = The practice of taking advantage of a price difference between two or more markets</p> Signup and view all the answers

<p>Forward contracts = A non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today Futures contracts = A standardized contract to buy or sell a particular commodity or financial instrument at a pre-determined price in the future Options = A contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price Swaps = A derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument</p> Signup and view all the answers

<p>Hedging = Using derivatives to reduce the risk of adverse price movements in an asset Speculation = Using derivatives to bet on the future direction of the underlying asset Arbitrage = Using derivatives to profit from price discrepancies in different markets Risk management = Using derivatives to manage various forms of financial risk</p> Signup and view all the answers

<p>Market Manipulation = Concern that large players could use derivatives to manipulate market prices Systemic Risk = Concern that the failure of a major player in derivatives could cause a domino effect Speculative Bubble = Concern that excessive trading in derivatives could inflate asset prices beyond their intrinsic value Lack of Transparency = Concern that the complexity and lack of standardization in derivatives could hide risks</p> Signup and view all the answers

<p>Notional Amount = The total value of the underlying assets on which the derivatives are based Market Value = The price at which the derivatives could be exchanged in the current market Open Interest = The number of derivative contracts that have not yet been settled Trading Volume = The number of derivative contracts traded during a certain period of time</p> Signup and view all the answers