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.

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.

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.

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

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

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

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

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