10 Questions
Which type of derivative is designed for the purpose of exchanging cash flows based on a specified underlying asset at a specified future date?
Swaps
In the context of derivatives, why are they often considered a 'Zero Sum Game'?
Because the gains of one party in a derivative trade exactly offset the losses of the other party.
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?
Options
What is the major difference between Futures and Forwards contracts?
Futures contracts are exchange-traded, while Forwards contracts are privately negotiated agreements
In derivatives trading, what does it mean when a contract is referred to as a 'Zero Sum Game'?
For every gain made by one party in the derivative contract, an equal loss is incurred by the other party
Why do derivatives play a significant role in hedging risk?
Derivatives derive their value from underlying assets, helping in risk management
What is a key difference between forwards and futures contracts?
Forwards are OTC derivatives, while futures are traded on exchanges.
Why do hedgers use derivatives in the market?
To lock-in prices at the current date to protect against future price movements.
What makes derivatives a zero-sum game in the financial market?
Because the gains of one party in a derivative contract must equal the losses of the other party.
Which statement correctly describes the nature of forward contracts?
Forward contracts are customized agreements between two parties for buying or selling an asset at a future date.
Test your understanding of derivatives, including types, underlying features, and why they are referred to as a zero-sum game. Explore concepts such as maturity, spot price, forward price, risk management, and contract size in derivatives. Delve into the relationship between buyers and sellers in derivative transactions.
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