3.5 Derivative Securities Review

What defines a derivative security?

• A security that has no intrinsic value
• A security whose value is determined by an underlying asset
• A bond with fixed interest rates
• A stock with guaranteed returns

Which of the following is NOT a major category of derivative securities?

• Swaps
• Forwards
• Options
• Bonds

In an options contract, what does a 'call option' represent?

• The right to sell an asset
• The right to buy an asset
• A mandatory purchase requirement
• A guaranteed investment return

What is the primary purpose of a futures contract?

• To guarantee investment returns
• To exchange cash flows immediately
• To exchange an asset at a predetermined future date
• To create instant liquidity

What distinguishes futures from forwards?

• Futures are unregulated
• Futures are traded on organized markets with standardized features
• Futures cannot be traded quickly
• Futures do not involve commodities

What is a swap primarily used for?

• Purchasing stocks
• Exchanging streams of cash flow based on certain events
• Creating permanent investments
• Eliminating market risk completely

What are the two primary purposes of derivative securities?

• Investment and speculation
• Hedging and speculation
• Trading and banking
• Insurance and lending

In hedging, what is the primary goal?

• To maximize profits
• To reduce price uncertainty
• To increase market volatility
• To eliminate all financial risk

What makes derivatives particularly risky?

• They are always guaranteed
• Their values fluctuate based on uncertain events
• They have fixed returns
• They are government-regulated

A put option gives the holder the right to:

• Buy an asset at a certain price
• Sell an asset at a certain price
• Trade unlimited assets
• Cancel a contract