Pre Session Quiz - Introduction To Derivatives

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  • 1/5 Questions

    Which one is not a derivative product?

    • Forwards
    • Futures
    • Options
    • Equity
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Pre Session Quiz - Introduction To Derivatives - Quiz
About This Quiz

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?

    • Underlying asset

    • Face value of the stock

    • Liquidity in the market

    Correct Answer
    A. Underlying asset
    Explanation
    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.

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  • 3. 

    Arbitrage is an attempt to make risk-free profits

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 4. 

    Derivatives are financial instruments used for

    • Speculation ("bets")

    • To hedge ("insurance").

    • Provide leverage

    • All the three options

    Correct Answer
    A. All the three options
    Explanation
    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.

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  • 5. 

    Hedging  

    • Is the process of diversifying risk.

    • Is the process of reducing risk by buying risk-free government bonds

    • Is the process of reducing risk by engaging in a financial transaction which offsets a position already taken.

    • 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.

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Quiz Review Timeline (Updated): Mar 19, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 19, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Aug 28, 2012
    Quiz Created by
    Anurag_quiz
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