Types of Derivatives and Zero Sum Game Quiz
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Questions and Answers

Which type of derivative is designed for the purpose of exchanging cash flows based on a specified underlying asset at a specified future date?

  • Futures
  • Options
  • Swaps (correct)
  • Equity Shares

    • In the context of derivatives, why are they often considered a 'Zero Sum Game'?

  • Because derivative trades do not involve any risks for the parties participating.
  • Because derivatives are not influenced by market conditions and always yield positive returns.
  • Because the gains of one party in a derivative trade exactly offset the losses of the other party. (correct)
  • Because derivative transactions always result in profits for all parties involved.

    • Which type of derivative provides the holder with the right, but not the obligation, to buy or sell an underlying asset at a specified price before or at a specified date?

  • Equity Shares
  • Swaps
  • Options (correct)
  • Futures

    • What is the major difference between Futures and Forwards contracts?

    <p>Futures contracts are exchange-traded, while Forwards contracts are privately negotiated agreements</p> Signup and view all the answers

    In derivatives trading, what does it mean when a contract is referred to as a 'Zero Sum Game'?

    <p>For every gain made by one party in the derivative contract, an equal loss is incurred by the other party</p> Signup and view all the answers

    Why do derivatives play a significant role in hedging risk?

    <p>Derivatives derive their value from underlying assets, helping in risk management</p> Signup and view all the answers

    What is a key difference between forwards and futures contracts?

    <p>Forwards are OTC derivatives, while futures are traded on exchanges.</p> Signup and view all the answers

    Why do hedgers use derivatives in the market?

    <p>To lock-in prices at the current date to protect against future price movements.</p> Signup and view all the answers

    What makes derivatives a zero-sum game in the financial market?

    <p>Because the gains of one party in a derivative contract must equal the losses of the other party.</p> Signup and view all the answers

    Which statement correctly describes the nature of forward contracts?

    <p>Forward contracts are customized agreements between two parties for buying or selling an asset at a future date.</p> Signup and view all the answers

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