Understanding Equity Derivatives

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Questions and Answers

What is the primary focus of equity derivatives?

  • Investing in government bonds
  • Trading stocks on the open market
  • Purchasing real estate properties
  • Speculating on future movements in stock prices (correct)

What is a common purpose of using equity derivatives?

  • Hedging against potential losses in stock holdings (correct)
  • Securing low-interest loans for business expansion
  • Generating passive income from dividends
  • Acquiring voting rights in a company

Which of the following best describes the nature of equity derivatives?

  • Long-term, low-volatility investment products
  • Stable and guaranteed income-generating assets
  • Low-risk, low-return financial instruments
  • Highly leveraged financial contracts with substantial risk (correct)

What role do equity derivatives play in financial markets?

<p>Facilitating price discovery and market liquidity (B)</p> Signup and view all the answers

Why might an investor use equity derivatives?

<p>To speculate on the future direction of stock prices (D)</p> Signup and view all the answers

What is a possible outcome of using equity derivatives for speculation?

<p>Potential amplification of investment returns through leverage (C)</p> Signup and view all the answers

How do equity derivatives differ from traditional stock investments?

<p>Equity derivatives have expiration dates and are based on the value of an underlying asset, while traditional stocks are perpetual investments. (D)</p> Signup and view all the answers

In what way can equity derivatives be used as a risk management tool?

<p>To protect against adverse changes in stock prices (D)</p> Signup and view all the answers

What distinguishes equity derivatives from fixed-income securities?

<p>Equity derivatives involve uncertainty about future returns, while fixed-income securities offer predictable cash flows. (B)</p> Signup and view all the answers

What feature makes equity derivatives attractive to some investors?

<p>Potential for unlimited profits with minimal initial investment (B)</p> Signup and view all the answers

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Study Notes

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