Which of the following best defines a derivative security?
Explanation
Derivatives are financial instruments whose value depends on (derives from) the value of an underlying asset.
Other questions
Which of the following is a characteristic of exchange-traded derivatives compared to over-the-counter derivatives?
Which of the following instruments is classified as a forward commitment?
A contingent claim differs from a forward commitment in that a contingent claim:
In a forward contract, the party who agrees to buy the financial asset has a:
Which of the following statements about cash-settled forward contracts is correct?
A primary difference between futures contracts and forward contracts is that futures contracts:
The settlement price of a futures contract is:
In futures markets, the number of contracts outstanding at any given time is called:
The clearinghouse in futures markets guarantees traders will honor obligations by:
In futures trading, the 'initial margin' is best described as:
A futures trader has an account with an initial margin of $10,000 and a maintenance margin of $7,500. If the margin balance falls to $7,000 due to market movements, the trader must deposit:
If a futures contract price changes by an amount that exceeds the daily price limit, the price is said to be:
A swap contract is best described as:
In a plain vanilla interest rate swap, the 'pay-floating' party:
The 'tenor' of a swap refers to:
Which of the following derivatives is a contingent claim?
The buyer of a call option has the:
An American option differs from a European option in that the American option:
Which of the following positions has an obligation to sell the underlying asset if exercised?
A credit default swap (CDS) is essentially:
Consider a call option with a premium of $5 and a strike price of $50. If the stock price at expiration is $58, the profit to the buyer is:
For a put option with a premium of $4 and a strike price of $40, the breakeven price for the buyer is:
The maximum loss for the writer (seller) of a call option is:
The maximum gain for the buyer of a put option is limited to:
Options trading is described as a zero-sum game because:
A credit spread option typically provides a payoff when:
One benefit of derivative markets is that they:
Arbitrage is best defined as:
According to the law of one price, two portfolios with identical future payoffs must have:
Which of the following describes a 'basis swap'?
In futures markets, 'maintenance margin' is the:
A wheat farmer sells wheat futures to reduce uncertainty about the harvest price. This trader is acting as a:
If a futures trader receives a margin call, they must deposit funds to bring the balance up to the:
An option is 'in the money' if:
For a call option, the breakeven price for the seller is:
Which of the following statements about option premiums is correct?
An investor buys a put option with a strike of $50 for a premium of $3. If the stock price is $40 at expiration, the net profit is:
The 'tick size' in a futures contract refers to:
Which of the following is an example of a 'forward commitment'?
If a portfolio of assets produces a risk-free return, arbitrage ensures that this return must equal:
A Non-Deliverable Forward (NDF) is effectively the same as:
In the context of options, the exercise price is also known as the:
Which derivative instrument typically requires no payment at initiation?
Marking to market in futures accounts occurs:
If a call option is 'out of the money', its value at expiration is:
A major criticism of derivatives is that they:
Which participant acts as the buyer to every seller and seller to every buyer in futures markets?
For a long forward position, the value at expiration is equal to:
If a stock is trading at $55 and a call option with a strike of $50 costs $5, the time value of the option is: