Pre Session Quiz - Introduction To Derivatives
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Which one is not a derivative product?
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Forwards
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Futures
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Options
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Equity
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This Pre-session Quiz on Introduction to Derivatives assesses understanding of financial instruments like derivatives, their valuation basis, and differentiation from equity. It also covers key financial strategies such as hedging and arbitrage, emphasizing their roles in risk management and profit generation.
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- 2.
Value for derivatives is derived from?
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Underlying asset
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Face value of the stock
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Liquidity in the market
Correct Answer
A. Underlying assetExplanation
The value for derivatives is derived from the underlying asset. Derivatives are financial contracts whose value is based on an underlying asset, such as stocks, bonds, commodities, or currencies. The price of the derivative is determined by the price movements of the underlying asset. Therefore, the value of derivatives is directly linked to the performance and fluctuations of the underlying asset.Rate this question:
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- 3.
Arbitrage is an attempt to make risk-free profits
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True
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False
Correct Answer
A. TrueExplanation
Arbitrage is a strategy used in financial markets to take advantage of price discrepancies between different markets or assets. By buying low in one market and selling high in another, traders can make risk-free profits. This is because they are exploiting temporary imbalances in prices, which are expected to correct themselves in the future. Therefore, the statement that arbitrage is an attempt to make risk-free profits is true.Rate this question:
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- 4.
Derivatives are financial instruments used for
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Speculation ("bets")
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To hedge ("insurance").
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Provide leverage
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All the three options
Correct Answer
A. All the three optionsExplanation
Derivatives are financial instruments that serve multiple purposes in the market. They can be used for speculation, allowing investors to make bets on the future direction of an asset's price. Additionally, derivatives can be used for hedging, providing insurance against potential losses in other investments. Lastly, derivatives offer leverage, allowing investors to control a larger position with a smaller amount of capital. Therefore, all three options - speculation, hedging, and leverage - accurately describe the uses of derivatives.Rate this question:
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- 5.
Hedging
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Is the process of diversifying risk.
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Is the process of reducing risk by buying risk-free government bonds
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Is the process of reducing risk by engaging in a financial transaction which offsets a position already taken.
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Is the process of trading financial derivatives
Correct Answer
A. Is the process of reducing risk by engaging in a financial transaction which offsets a position already taken.Explanation
Hedging is the process of reducing risk by engaging in a financial transaction which offsets a position already taken. This means that when an individual or entity hedges, they take a second position that is opposite to their initial position in order to minimize potential losses. By doing so, they are able to protect themselves against adverse market movements and mitigate the impact of any potential losses. This strategy is commonly used in financial markets to manage risk and protect investments.Rate this question:
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Current Version
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Mar 19, 2023Quiz Edited by
ProProfs Editorial Team -
Aug 28, 2012Quiz Created by
Anurag_quiz
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