Financial Derivatives - Practice Test & Case studies

Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, and speculation.

It is considered that derivatives increase the efficiency of financial markets. By using derivative contracts, one can replicate the payoff of the assets. Therefore, the prices of the underlying asset and the associated derivative tend to be in equilibrium to avoid arbitrage.

• Derivatives are financial contracts that derive their value from an underlying asset, group of assets, or benchmark.

• A derivative is set between two or more parties that can trade on an exchange or over-the-counter.

• Prices for derivatives derive from fluctuations in the underlying asset.

• Derivatives are usually leveraged instruments, which increases their potential risks and rewards.

• Common derivatives include futures contracts, forwards, options, and swaps.

A derivative is a complex type of financial security that is set between two or more parties. Traders use derivatives to access specific markets and trade different assets. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. Contract values depend on changes in the prices of the underlying asset.

Financial derivatives enable parties to trade specific financial risks (such as interest rate risk, currency, equity and commodity price risk, and credit risk, etc.) to other entities who are more willing, or better suited, to take or manage these risks—typically, but not always, without trading in a primary asset or commodity.

Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings. These assets are commonly traded on exchanges or OTC and are purchased through brokerages. The Chicago Mercantile Exchange (CME) is among the world's largest derivatives exchanges.

This a 2024 updated content that includes MCQ practice test allowing you getting ready to pass any exam  that includes financial derivatives and risk management.

After passing this course, you will :

• Have a good understanding of derivative securities.

• Acquire knowledge of how forward contracts, futures contracts, swaps and options work, how they are used and how they are priced.

• Be able to decide which securities to use for hedging and/or speculative purposes.