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Derivatives Market Users and Key Differences from Cash Market

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Derivatives Market Users and Key Differences from Cash Market

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Questions and Answers

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?

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?

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?

<p>Price change in a forward contract equals price change in the underlying</p> Signup and view all the answers

In what scenario would a derivative instrument have no value?

<p>In absence of a valuable underlying asset</p> Signup and view all the answers

Derivatives Market Users and Key Differences from Cash Market

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Questions and Answers

What is the defining characteristic of a derivative?

Why is the presence of an underlying asset important for derivative instruments?

What happens to the buyer of a forward contract if the price of the underlying asset is higher than the contract price at maturity?

Which statement is true about the relationship between derivatives and their underlying assets?

In what scenario would a derivative instrument have no value?

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