Pre Session Quiz - Introduction To Derivatives
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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
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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.
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
Correct Answer
A. EquityExplanation
Equity is not a derivative product. Derivative products are financial instruments whose value is derived from an underlying asset, such as stocks, commodities, or currencies. Forwards, futures, and options are all examples of derivative products because their value is based on the value of an underlying asset. However, equity refers to ownership in a company and is not considered a derivative product.Rate this question:
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- 4.
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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- 5.
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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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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