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Derivatives MCQ - Derivatives Section 1

1 Which of the following is not a derivative?

Mutual funds do not transform the value of a payoff of an underlying asset; they merely pass those payoffs through to their holders. Hence they are not derivatives.

2 Which of the following statements is most likely to be correct about derivatives?

A
A derivative is a financial instrument that derives its value based on the performance of the underlying.
B
Derivatives are standardized financial instruments and cannot be customized.
C
The performance of a derivative is derived by replicating the performance of the underlying.

The value of a derivative is based on the performance of the underlying.

3 Which of the following statements about derivatives is least accurate?

Derivatives have high degrees of leverage.

4 Which of the following statements about derivatives is not true?

Derivatives are not created in the spot market, which is where the underlying trades

5 Which of the following statements about exchange-traded derivatives is least accurate?

Exchange-traded contracts have less credit risk than OTC derivatives.

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Question:

One way to describe the margin in a futures market is:

A. A good faith deposit that covers possible future losses.
B. A loan to the futures trader.
C. The difference between the futures price and the spot price.

Correct answer: A

Explanation:

The initial margin can be thought of as a good faith deposit or performance bond. It covers possible future losses.

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