18 Questions
What is the primary purpose of swaps in the market?
Reducing risks associated with volatile interest rates, currency exchange rates, and commodity prices
Which type of market participant uses derivatives to reduce their exposure to market variables like interest rates and share prices?
Hedgers
Why do speculators prefer derivatives over underlying assets for trading purposes?
Derivatives provide leverage, are less expensive, and are faster to execute in size
Which market participant tries to predict future movements in prices of underlying assets?
Traders
What is the primary goal of arbitrageurs in the market?
Exploiting price differences in different markets for profit
Why do corporations and banks use derivative products?
To reduce their risk from exposure to market variables like interest rates and share prices
What is one of the risks faced by market participants in derivatives trading?
Operational risk
Why do traders in the derivatives market want to take risks?
To give away the risk
What document should market participants carefully read before trading in derivatives?
Model Risk Disclosure Document
Which of the following is NOT a risk associated with derivatives trading?
Interest rate risk
What does the organized market provide in the context of the financial system?
Risk management mechanism
Why may derivatives trading not be suitable for someone with limited resources?
Because of leverage and associated risks
What is the primary reason why corporations, investing institutions, banks, and governments use derivative products?
To hedge or reduce their exposures to market variables
In what ways are futures contracts beneficial for speculators compared to trading the underlying asset?
Futures contracts allow for higher leverage and potential returns
Which type of market participant typically sells index futures to protect their equity portfolio from stock market corrections?
Hedgers
What is a common application of futures contracts for traders in the derivatives markets?
Speculating on quarterly earnings reports
Which participant in the derivatives market benefits the most from locking in a price for a future delivery using futures contracts?
Hedgers seeking to manage risk exposures
Why do traders often prefer futures contracts when speculating on financial assets and commodities?
Futures contracts provide a cheaper alternative with higher potential returns
Learn about how swaps help market participants manage risks related to interest rates, currency exchange rates, and commodity prices. Explore the roles of hedgers, traders, and arbitrageurs in the derivatives market and how they use derivatives to mitigate risks.
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