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Introduction to Derivative Contracts

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Questions and Answers

What is the main characteristic of a derivative?

It has a fixed price

Its value is derived from changes in the price of an underlying asset (correct)

It is a financial product

It is traded over the counter

How does a forward contract differ from a futures contract?

Forward contracts are customizable and traded on the exchange, while futures are not customizable.

Forward contracts are agreements between three parties, while futures contracts involve only two parties.

Futures contracts are agreements to buy/sell at a predetermined price, while forward contracts are agreements based on current market prices. (correct)

Futures contracts are traded over the counter, while forward contracts are standardized.

What is the primary difference between call and put options?

Put options have a fixed price, while call options have a variable price.

Call options are traded over the counter, while put options are traded on exchanges.

Call options give the buyer the obligation to sell, while put options give the right to buy.

Call options provide the right but not the obligation to purchase, while put options provide the right but not the obligation to sell. (correct)

Which type of derivative contract is customizable and traded over the counter?

Forward contract Signup and view all the answers

What does an option contract provide the buyer with?

Right but not obligation to buy/sell at a predetermined price Signup and view all the answers

What is the main difference between publicly held and privately held firms?

Privately held firms sell their securities to a small group of investors, while publicly held firms sell their securities to the general public. Signup and view all the answers

What is the role of an underwriter in the issuance of securities?

An underwriter evaluates and assumes another party's risk, acting as a middleman in marketing securities. Signup and view all the answers

Which statement accurately describes privately held firms?

Privately held firms are not obligated to release financial statements to the public. Signup and view all the answers

What differentiates publicly held firms from privately held firms regarding ownership?

Publicly held firms are owned by individuals or corporations, while privately held firms are owned by founders, managers, private investors, or families. Signup and view all the answers