Post Session Quiz - Introduction To Derivatives

The correct answer is "customized, privately negotiated contract that is traded directly between counterparties." OTC derivatives refer to financial contracts that are not traded on a centralized exchange but instead are privately negotiated and customized to meet the specific needs of the counterparties involved. These contracts are typically not standardized like centralised trading products and do not involve any credit risk.

The statement implies that in most countries, the OTC (over-the-counter) market is larger in size compared to the exchange traded derivatives market. However, in Brazil, the opposite is true, meaning that the exchange traded derivatives market is bigger than the OTC market.

The given statement suggests that in Brazil, more than 80% of the interdealer derivatives trading occurs through exchanges. This means that a significant majority of the trading in this market is conducted on organized platforms rather than directly between dealers. This information implies that exchanges play a crucial role in facilitating derivatives trading in Brazil, indicating that the statement is true.

The correct answer is "All the options." This means that an Exchange Traded derivative contract has standardized features, greater transparency, settlement months specified, and the credit risk is borne by the exchange.

Interest rate derivatives are the highest traded derivatives in the global market because they are widely used by financial institutions, corporations, and investors for hedging against interest rate fluctuations. These derivatives allow market participants to manage and speculate on changes in interest rates, which are crucial in various financial transactions such as loans, bonds, and mortgages. The high trading volume of interest rate derivatives can be attributed to the significant impact of interest rates on the global economy and the need for market participants to mitigate their interest rate risk.

CDS (Credit Default Swaps) and Credit Spread options are commonly used derivatives for managing default risk. CDS allows investors to protect against the risk of default by buying insurance on a bond or loan. Credit Spread options provide the right to buy or sell a security at a specified spread over a reference rate, allowing investors to hedge against credit risk. Index Futures and Equity options are not specifically designed for managing default risk, although they may have some indirect impact on overall portfolio risk management.

Derivatives products are widely used for various purposes. One major use is hedging risk, where investors use derivatives to offset potential losses in their portfolios. Another major use is the leveraging effect, where investors can amplify their returns by using derivatives. Speculation is also a common use, as investors can take positions on the future price movements of underlying assets. Lastly, derivatives can be used for arbitrage, where investors take advantage of price discrepancies between different markets or instruments. Delivery, however, is not a major use of derivatives products.