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Questions and Answers
What is the defining characteristic of a derivative?
What is the defining characteristic of a derivative?
- Not dependent on any underlying asset
- Traded on physical commodity exchanges
- Value remains constant regardless of market fluctuations
- Value derived from one or more underlying variables (correct)
Why is the presence of an underlying asset important for derivative instruments?
Why is the presence of an underlying asset important for derivative instruments?
- Increases the chances of default
- Helps in determining profit/loss on maturity (correct)
- Makes them independent of market risks
- To ensure they have no value
What happens to the buyer of a forward contract if the price of the underlying asset is higher than the contract price at maturity?
What happens to the buyer of a forward contract if the price of the underlying asset is higher than the contract price at maturity?
- Breaks even
- Suffers a loss
- Makes a profit (correct)
- Has no impact
Which statement is true about the relationship between derivatives and their underlying assets?
Which statement is true about the relationship between derivatives and their underlying assets?
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In what scenario would a derivative instrument have no value?
In what scenario would a derivative instrument have no value?
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