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Derivatives Markets

Description: This quiz is designed to assess your understanding of the key concepts and instruments used in derivatives markets.
Number of Questions: 14
Created by:
Tags: derivatives options futures forwards hedging speculation
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What is a derivative?

  1. A financial instrument whose value is derived from an underlying asset.

  2. A type of investment that involves buying and selling stocks.

  3. A loan taken out by a company to finance its operations.

  4. A type of insurance policy that protects against financial loss.

Show answer
Correct Option: A
Explanation:

A derivative is a financial instrument that derives its value from an underlying asset, such as a stock, bond, commodity, or currency.

What are the two main types of derivatives?

  1. Options and futures

  2. Forwards and swaps

  3. Options and forwards

  4. Futures and swaps

Show answer
Correct Option: A
Explanation:

The two main types of derivatives are options and futures.

What is an option?

  1. A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

  2. A contract that requires the buyer to buy or sell an underlying asset at a specified price on or before a specified date.

  3. A contract that gives the seller the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

  4. A contract that requires the seller to buy or sell an underlying asset at a specified price on or before a specified date.

Show answer
Correct Option: A
Explanation:

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

What is a future?

  1. A contract that requires the buyer to buy or sell an underlying asset at a specified price on or before a specified date.

  2. A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

  3. A contract that requires the seller to buy or sell an underlying asset at a specified price on or before a specified date.

  4. A contract that gives the seller the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

Show answer
Correct Option: A
Explanation:

A future is a contract that requires the buyer to buy or sell an underlying asset at a specified price on or before a specified date.

What is the difference between an option and a future?

  1. An option gives the buyer the right, but not the obligation, to buy or sell an underlying asset, while a future requires the buyer to buy or sell the underlying asset.

  2. An option requires the buyer to buy or sell an underlying asset, while a future gives the buyer the right, but not the obligation, to buy or sell the underlying asset.

  3. An option is a contract that expires on a specified date, while a future is a contract that does not expire.

  4. An option is a contract that is traded on an exchange, while a future is a contract that is traded over-the-counter.

Show answer
Correct Option: A
Explanation:

The main difference between an option and a future is that an option gives the buyer the right, but not the obligation, to buy or sell an underlying asset, while a future requires the buyer to buy or sell the underlying asset.

What is the purpose of a derivative?

  1. To hedge against risk

  2. To speculate on the price of an underlying asset

  3. To generate income

  4. All of the above

Show answer
Correct Option: D
Explanation:

Derivatives can be used for a variety of purposes, including hedging against risk, speculating on the price of an underlying asset, and generating income.

What is hedging?

  1. Using derivatives to reduce risk

  2. Using derivatives to increase risk

  3. Using derivatives to speculate on the price of an underlying asset

  4. Using derivatives to generate income

Show answer
Correct Option: A
Explanation:

Hedging is using derivatives to reduce risk.

What is speculation?

  1. Using derivatives to increase risk

  2. Using derivatives to reduce risk

  3. Using derivatives to generate income

  4. Using derivatives to speculate on the price of an underlying asset

Show answer
Correct Option: D
Explanation:

Speculation is using derivatives to speculate on the price of an underlying asset.

What is the difference between a call option and a put option?

  1. A call option gives the buyer the right to buy an underlying asset at a specified price, while a put option gives the buyer the right to sell an underlying asset at a specified price.

  2. A call option gives the buyer the right to sell an underlying asset at a specified price, while a put option gives the buyer the right to buy an underlying asset at a specified price.

  3. A call option requires the buyer to buy an underlying asset at a specified price, while a put option requires the buyer to sell an underlying asset at a specified price.

  4. A call option requires the buyer to sell an underlying asset at a specified price, while a put option requires the buyer to buy an underlying asset at a specified price.

Show answer
Correct Option: A
Explanation:

The main difference between a call option and a put option is that a call option gives the buyer the right to buy an underlying asset at a specified price, while a put option gives the buyer the right to sell an underlying asset at a specified price.

What is the difference between a futures contract and a forward contract?

  1. A futures contract is traded on an exchange, while a forward contract is traded over-the-counter.

  2. A futures contract is standardized, while a forward contract is customized.

  3. A futures contract requires the buyer to buy or sell an underlying asset at a specified price on or before a specified date, while a forward contract does not require the buyer to buy or sell the underlying asset.

  4. All of the above

Show answer
Correct Option: D
Explanation:

The main differences between a futures contract and a forward contract are that a futures contract is traded on an exchange, while a forward contract is traded over-the-counter; a futures contract is standardized, while a forward contract is customized; and a futures contract requires the buyer to buy or sell an underlying asset at a specified price on or before a specified date, while a forward contract does not require the buyer to buy or sell the underlying asset.

What is the Black-Scholes model?

  1. A model for pricing options

  2. A model for pricing futures

  3. A model for pricing forwards

  4. A model for pricing swaps

Show answer
Correct Option: A
Explanation:

The Black-Scholes model is a model for pricing options.

What are the Greeks in options pricing?

  1. Measures of the sensitivity of an option's price to changes in various factors

  2. Measures of the sensitivity of an option's price to changes in the underlying asset's price

  3. Measures of the sensitivity of an option's price to changes in the risk-free interest rate

  4. Measures of the sensitivity of an option's price to changes in the time to expiration

Show answer
Correct Option: A
Explanation:

The Greeks in options pricing are measures of the sensitivity of an option's price to changes in various factors, such as the underlying asset's price, the risk-free interest rate, and the time to expiration.

What is the most common type of option?

  1. Call option

  2. Put option

  3. Straddle

  4. Strangle

Show answer
Correct Option: A
Explanation:

The most common type of option is the call option.

What is the most common type of future?

  1. Stock index future

  2. Commodity future

  3. Currency future

  4. Interest rate future

Show answer
Correct Option: A
Explanation:

The most common type of future is the stock index future.

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