Financial Derivatives Course Quiz

Derivatives traded directly between two parties without an exchange.

Derivatives traded on a specialized exchange.

Agreement to buy or sell an asset at a future date for a set price.

Key elements of a forward contract: asset, quantity, price, and delivery date/currency.

The asset (commodity, currency, index, stock, etc.) specified in the contract for a forward contract.

Specifies the amount of the underlying asset in a forward contract.

The price agreed upon for a forward contract on the specified maturity date.

Specifies the date and currency of payment on the forward contract.

No payment is required at the time of agreement; a promise to exchange an asset at a future date and price is all that's needed.

The exchange of money or commodity happens only on the contract's maturity date, not when the contract is made.

Gains or losses from price fluctuations are symmetrical. A buyer's gain equals the seller's loss, and vice-versa.

These contracts aren't traded on stock exchanges; they're private agreements.

A financial institution or an intermediary facilitates the contract between the two parties.

The asset is delivered only on the contract's expiration date.

Parties can adjust contract terms (asset, quantity, price, etc.) to their specific needs.

The agreement in the contract fixes the price, limiting the risk of price changes.

A standardized contract where parties agree to buy or sell an asset at a future date, marked to market daily.

Futures contracts settle daily profit/loss based on price differences from the previous day, rather than when the contract expires.

A key function of futures contracts; buyers/sellers use futures to protect against potential price changes in the underlying asset.

Price fluctuations in futures contracts equally affect both buyers and sellers.

Futures contracts are traded on organized exchanges, allowing for future transactions.

In futures contracts, delivery of the asset isn't mandatory; the difference between contract price and market price often settles the contract.

Standardized forward contracts, when traded on exchanges become futures contracts; practically identical.

The current market price for an underlying asset.

A financial contract that obligates the buyer to purchase or the seller to sell a specific underlying index at a predetermined price on a future date.

The benchmark index referenced in an index future contract, representing a basket of assets.

The standardized number of index units covered by one index future contract.

The minimum price fluctuation allowed for an index future contract.

Predefined upper and lower price limits within which an index future can trade during a trading session.

A position where an investor buys an index future contract with the expectation that the underlying index will increase in value.

A position where an investor sells an index future contract with the expectation that the underlying index will decrease in value.

A graph that visualizes the potential profit or loss for an index future position at different underlying index price levels.

A derivative where one party (buyer) has the right, but not the obligation, to buy or sell an underlying asset from the other party (seller) at a set price (strike price) on or before a specific date.

The price the buyer pays the seller for the right to buy or sell the underlying asset in an option contract.

An option that gives the buyer the right to buy the underlying asset at a certain price on or before a specific date.

An option that gives the buyer the right to sell the underlying asset at a certain price on or before a specific date.

The party in an option contract who has the right to buy or sell the underlying asset.

The party in an option contract who has the obligation to sell or buy the underlying asset if the buyer exercises their option.

The price at which the underlying asset can be bought or sold in an option contract.

The last day on which the option buyer can exercise their right to buy or sell the underlying asset.

A call option buyer profits when the underlying asset's price exceeds the strike price at expiration. The profit is the difference between the spot price and the strike price. Losses are limited to the premium paid.

The maximum loss for a call option buyer is the premium paid for the option. This occurs when the spot price of the underlying is less than the strike price at expiration.

The call option writer (seller) profits from the premium received. They incur a loss if the spot price of the underlying asset rises above the strike price at expiration.

The writer's potential loss is unlimited if the spot price of the underlying asset keeps rising. The higher the spot price, the greater the loss for the writer.

A call option is considered 'in-the-money' when the spot price of the underlying asset is higher than the strike price. This makes it profitable to exercise the option.

A call option is 'out-of-the-money' when the spot price of the underlying asset is below the strike price. Exercising the option would result in a loss for the buyer.

This is the price paid by the buyer of a call option to acquire the right to buy the underlying asset at the strike price. The writer of the option receives this premium upon selling the option.

This is the date on which the call option contract expires. The buyer can only exercise their right to buy the underlying asset at the strike price before the expiration date.