Pre Session Quiz - Introduction To Derivatives

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.

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.

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.

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.

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.