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1. What are the main reasons for participating in Derivatives Markets?
● To reduce the exposure to future price movements of the underlying asset.
● To take risks in the derivatives markets in order to profit from their
expectation of future price movement of the underlying asset.
2. What are the defining characteristics of Derivatives?
● They derive their value (and risk) from the price movement of an
underlying asset or group of assets.
● They are agreements (contracts) between two or more parties.●
They expire or settle on a particular date.
3. What is the difference between hedging and speculating?
Provide an example for each.
● Hedging: when you have underlying asset and you will use the asset in the future,
For example: you possess gold and you think that the price of gold in the
future will decrease so you sell them in the present to get the highest profit
● Speculating: You do not have asset and you don’t need to use in future.
For example: You think the price of a parcel will increase in the future so
you buy it and wait until the price increase, you will sell it to take the profit
4. Under what conditions would Derivatives cease to exist?
When the price of everything is stable all the time
5. What are the advantages and disadvantages of using Forward contracts?
● Advantages: By using a Forward Contract, you can protect
yourself from adverse movements in exchange rates and take
advantage of a great rate between the date of sale and the settlement date.
● Disadvantages:The seller of a forward contract is said to have a
short position and is obligated to sell the asset to the buyer for the forward price. lOMoARcPSD| 50032646
6. When should an investor take a long or short position in Forward contracts?
● The buyer of a forward contract is said to have a long position ●
The seller of a forward contract is said to have a short position.
7. At a specific point in time, what is the payoff for long and short
positions in Forward contracts?
● Long position payoff: Profit when the spot price is greater than the forward price.
● Short position payoff: Profit when the spot price is less than the forward price.
8. What advantages do Futures contracts have over Forwards? + Standardized + Low credit risk
+ Daily settlement of all contract
9. How can investors use Futures contracts for speculation?
Anticipating Price Movements: Speculators seek to profit by predicting
whether the price of an asset will rise or fall in the future. They enter into
futures contracts based on their expectations for the direction of the market.
10.In which situations is it suitable to take a long call or short put
position? Which option is more optimal? Long Call:
● You expect the asset's price to rise significantly. ● Loss is the premium paid ● High upside potential Short Put
● You expect the asset’s price to stay above the strike price.
● Income generation: Collect premium from selling the put.● Willing to buy the asset if assigned.
Choosing one of two options depends on the situation
11.In which situations is it suitable to take a long put or short call
position? Which option is more optimal? lOMoARcPSD| 50032646 Long Put: ● Expect price to fall. ● Limited risk Short Call:
● expect price to stay below strike.
● Income generation by collecting premium