Derivatives - Derivatives Section 1
31. Which of the following accurately describes a credit derivative?
- A
In a credit derivative, the seller provides the buyer with protection against credit risk of a third party.
- B
At the initiation of the contract of a credit derivative, the buyer and seller provide a performance bond.
- C
The buyer and seller of a credit derivative are provided with a credit guarantee by the clearinghouse.
- Option : A
- Explanation : A credit derivative is a derivative contract in which the seller provides credit protection to the buyer against the credit risk of a third party. B and C are incorrect because these are characteristics of futures, not credit derivative.
32. Which of the following statements is most accurate?
- A
A forward contract is default-free, whereas a futures contract is not.
- B
A forward contact allows parties to enter into a customized transaction, whereas a futures contract does not.
- C
A forward contract can easily be offset prior to expiration, whereas it is difficult to offset a futures contract prior to expiration.
- Option : B
- Explanation : Unlike futures contracts, which have standardized features, forward contracts can be customized to suit the needs of the parties involved.
- Option : A
- Explanation : In the futures markets the investor must top up to the initial margin. In the stock market an investor only needs to top up to the maintenance margin.
34. One way to describe the margin in a futures market is:
- Option : A
- Explanation : The initial margin can be thought of as a good faith deposit or performance bond. It covers possible future losses.
35. Which of the following is an advantage of the derivatives market?
- Option : B
- Explanation : Derivatives facilitate risk allocation by making it easier and less costly to transfer risk.
