clearlycanadian

Which of the following is NOT an over-the-counter (OTC) derivative?

A) A futures contract.

B) A forward contract.

C) A bond option.

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Futures contracts are exchange-traded; forwards and most bond options are OTC derivatives.

clearlycanadian

Which of the following definitions involving derivatives is least accurate?

A) A call option gives the owner the right to sell the underlying good at a specific price for a specified time period.

B) An option writer is the seller of an option.

C) An arbitrage opportunity is the chance to make a riskless profit with no investment.

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A call option gives the owner the right to buy the underlying good at a specific price for a specified time period.

clearlycanadian

Which of the following is most likely an exchange-traded derivative?

A) Equity index futures contract.

B) Bond option.

C) Currency forward contract.

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Futures are exchange-traded derivatives. Forward contracts and swaps are over-the-counter derivatives. Bond options are traded almost entirely in the over-the-counter market.

clearlycanadian

A derivative security:

A) has no default risk.

B) has a value based on stock prices.

C) has a value based on another security or index.

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This is the definition of a derivative security. Those based on stock prices are equity derivatives.

clearlycanadian

A financial instrument that has payoffs based on the price of an underlying physical or financial asset is a(n):

A) option.

B) derivative security.

C) future.

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Options and futures are examples of types of derivative securities.

clearlycanadian

A derivative security:

A) is like a callable bond.

B) has a value dependent on the shape of the yield curve.

C) is one that is based on the value of another security.

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A derivative security is one that ‘derives’ its value from that of another security.