Derivatives in the Financial Market
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Questions and Answers

Which one of the following accurately describes a derivative?

  • A financial instrument that transforms the performance of the underlying asset
  • A financial instrument that derives its value from the performance of an underlying asset (correct)
  • A financial instrument that exchanges cash flows in the present based on an underlying value
  • A financial instrument that directly passes through the returns of the underlying asset

    • What is the underlying asset in a derivative?

  • The asset that exchanges cash flows in the present
  • The asset that derives its value from the performance of the derivative
  • The asset that directly passes through the returns of the derivative
  • The asset that the derivative is based on (correct)

    • What does a forward contract allow market participants to do?

  • Exchange cash flows in the future based on an underlying value (correct)
  • Transform the performance of the underlying asset
  • Pass through the returns of the underlying asset
  • Transfer the price risk of underlying assets to a second party

    • In the example given in Exhibit 1, what does AMY Investments agree to deliver?

    <p>1,000 shares of Airbus (AIR)</p> Signup and view all the answers

    What is the purpose of a derivative?

    <p>To derive value from the performance of the underlying asset</p> Signup and view all the answers

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