Question
Match the following: A) Forward P) at a
particular price on a pre-specified date B) Futures Q) whose value depends on the value of underlying asset C) Options R) right but not the obligation to trade D) Derivative S) traded on an exchangeSolution
Derivative securities are those whose value depends on the value of another asset (called the underlying asset). The different types of derivatives include forwards, futures, options, swaps etc. A forward contract is a contract to trade in a particular asset (which may be another security) at a particular price on a pre-specified date. Futures are standardized forward contract that are traded on an exchange and where the counter-party (the party with which the contract has been signed) is the exchange itself. Options are one-way contract where one party has the right but not the obligation to trade in an asset at a particular price on a pre-determined date/dates or in a particular time interval. Interest rate swaps are agreements where one side pays the other a particular interest rate (fixed or floating) and the other side pays the other a different interest rate (fixed or floating).
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