Practice Question Set: Introduction to Derivatives

Chapter 4. Introduction to Derivatives Practice Question set contains 23 pages covering the following learning objectives:

* Define derivatives, describe features and uses of derivatives, and compare linear and non-linear derivatives.

* Describe the over-the-counter market, distinguish it from trading on an exchange, and evaluate its advantages and disadvantages.

 * Differentiate between options, forwards, and futures contracts.

* Identify and calculate option and forward contract payoffs.

* Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs.

* Calculate and compare the payoffs from hedging strategies involving forward contracts and options.

* Calculate and compare the payoffs from speculative strategies involving futures and options.

* Calculate an arbitrage payoff and describe how arbitrage opportunities are temporary.

* Describe some of the risks that can arise from the use of derivatives.

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