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Tutorial 1 - Introduction To Derivatives

This document provides an introduction to derivatives, including definitions of forward contracts, futures contracts, and swaps. It also discusses arbitrage opportunities. - A forward contract involves the exchange of an item for cash at a predetermined future date, while a futures contract is exchange-traded with standardized terms. - The main difference between forwards and futures is that futures are exchange-traded and have standardized terms, while forwards are over-the-counter with negotiated terms. - A swap is an agreement to exchange future cash flows of different assets, such as interest rates. - The major impediment to using forward contracts is counterparty risk from the reputation and credit standing of the other party.

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ne002
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89 views

Tutorial 1 - Introduction To Derivatives

This document provides an introduction to derivatives, including definitions of forward contracts, futures contracts, and swaps. It also discusses arbitrage opportunities. - A forward contract involves the exchange of an item for cash at a predetermined future date, while a futures contract is exchange-traded with standardized terms. - The main difference between forwards and futures is that futures are exchange-traded and have standardized terms, while forwards are over-the-counter with negotiated terms. - A swap is an agreement to exchange future cash flows of different assets, such as interest rates. - The major impediment to using forward contracts is counterparty risk from the reputation and credit standing of the other party.

Uploaded by

ne002
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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TUTORIAL 1 INTRODUCTION TO DERIVATIVES

1. Which of the following best describes the nature of a forward contract? With a forward

contract, the two parties agree to: A exchange an item of a specific quality for cash at a future predetermined date. B exchange an item for an agreed amount of cash at a future predetermined date. C exchange a given amount of an item for an agreed amount of cash at a future predetermined date. D exchange a given amount of an item of a specific quality for an agreed amount of cash at a future predetermined date.
2. Which of the following correctly describes a futures contract?

A A futures is an instrument whose value depends on the values of other more basic underlying variables. B An exchange-traded contract to buy or sell a specific amount of an asset or security for a specific price or rate on a specific future date. C An agreement to buy or sell an asset at a certain time in the future for a certain price (the delivery price). D All of A, B, and C.

3. What is the economic difference between forward contracts and futures?

A There is no economic difference between forward contracts and futures. B Futures are only available on some underlying assets, whereas it is possible to trade any asset with forward contracts. C Futures contracts are traded on an exchange and have standardised terms and conditions whereas forward contracts are traded over-the-counter and have negotiated terms. D Both B and C explain the economic difference between forward and futures contracts.

4. Which of the following is correct? A swap is:

A An agreement between two counterparties to exchange two different sets of future periodic cash flows. B The spot purchase or sale of a commodity combined with the simultaneous sale or purchase of the same commodity in the forward market. C The sale of one security to purchase another. D None of A, B, or C, correctly defines a swap.

5. Which of the following is correct? The major impediment to market participants using

forward contracts is: A The reputation and credit standing of the counterparty on the other side. B The lack of counterparties willing to enter the other side of the transaction. C There are no transactions available with the right maturity. D All of A, B and C.

6. The general rule for undertaking arbitrage is this: and which means, in terms of

derivatives, a derivative instrument when its price is its theoretical or fair value price. Which of the following is correct? A buy low sell high selling above B sell low buy high buying below C buy low sell high buying below D sell low buy high selling above

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