Derivatives in Finance

What is the primary purpose of using derivatives according to the text?

To speculate and make profits
To hedge against market volatility (correct)
To park surplus funds
To benefit from price differences in different markets

Which of the following is NOT mentioned as an advantage of derivative trading in the text?

Benefiting from price differences in different markets (correct)
Hedging against market volatility
Transferring risk
Profiting from price fluctuations without selling underlying assets

How can derivatives be used to hedge against a drop in stock prices?

By entering a derivative contract that predicts a drop in stock prices (correct)
By entering a derivative contract that predicts a rise in stock prices
By using derivatives to profit from the price fluctuations
By transferring the risk of stock price drops to another party

What is the primary way individuals use derivatives according to the text?

To speculate and make profits (C) Signup and view all the answers

Which of the following is NOT mentioned as a way to use derivatives to protect against price changes?

Using derivatives to benefit from price differences in different markets (C) Signup and view all the answers

What is one way individuals can use derivatives to 'transfer risk'?

By using derivatives to profit from price fluctuations without selling underlying assets (B) Signup and view all the answers

What is the primary purpose of traders who use margin to buy and sell securities?

To borrow money from stockbrokers to trade (C) Signup and view all the answers

What is the main difference between American and European options?

American options can be exercised any time before expiry, while European options can only be exercised on the expiration date (B) Signup and view all the answers

What is the key feature of futures contracts?

Futures contracts require the parties to perform the contract at the agreed price and date (D) Signup and view all the answers

What is the main purpose of arbitrageurs?

To profit from low-risk market imperfections (D) Signup and view all the answers

Which of the following is not a major type of derivative contract?

Bonds (C) Signup and view all the answers

What is the key feature of forward contracts?

Forward contracts require the parties to perform the contract (D) Signup and view all the answers

What was the last action taken by RBI in February 2023?

Increased interest rates (D) Signup and view all the answers

What does the term 'higher for longer' refer to in the context of India?

Extended period of higher growth rates (A) Signup and view all the answers

What is the typical range of periods for which government bonds can be issued in India?

5 to 40 years (D) Signup and view all the answers

Why are government bonds considered safe investments in India?

They are backed by the Indian government (D) Signup and view all the answers

What is the typical interest rate range on Government Securities (G-Secs) in India?

7% to 10% (C) Signup and view all the answers

What is the characteristic of fixed-rate government bonds?

Interest rate is fixed for entire tenure (B) Signup and view all the answers

What is the primary purpose of derivatives investing?

To speculate on the value of underlying assets (C) Signup and view all the answers

Which of the following is NOT commonly used as an underlying asset for derivatives?

Real estate (B) Signup and view all the answers

In derivative trading, what is the purpose of using leverage?

To speculate on the directional movement of an asset (A) Signup and view all the answers

What is the main difference between over-the-counter derivative trading and exchange-based trading?

Counterparty risk only exists in over-the-counter trading (A) Signup and view all the answers

How can derivatives be used to hedge a position?

By entering into contracts to offset potential losses (C) Signup and view all the answers

What is the main risk associated with over-the-counter derivative trading?

Counterparty risk (A) Signup and view all the answers

What is the primary driver behind international investment according to the text?

The need to stay internationally competitive (B) Signup and view all the answers

How does globalization impact international investment according to the passage?

It increases international investment as economies become more connected (B) Signup and view all the answers

What is the role of international investment in economic development according to the passage?

It transforms economies and prepares them for industrial activity (D) Signup and view all the answers

According to the passage, what is the impact of globalization on economies?

It knits economies into each other through increased investment (A) Signup and view all the answers

What is the primary benefit of international investment for companies according to the text?

Lower production costs due to pricing differences (B) Signup and view all the answers

How does the passage describe the relationship between globalization and international investment?

They are mutually reinforcing and lead to one another (C) Signup and view all the answers