Banking Awareness Set 86 (Derivatives)

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Banking Awareness Questions for upcoming banks and insurance exams SBI PO, IBPS PO/Clerk, Federal Bank, RRB PO/Clerk, RBI, IPPB.

A derivative (a financial instrument) is a contract between two parties which derives its value/price from an underlying asset.
In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying.

  1. Which of the following is the class of derivative whose value is at least partly derived from one or more underlying stock exchange securities? [Asked in SBI PO Main 2017 Exam]
    A) Trade Derivative
    B) Equity Derivative
    C) Interest Rate Derivative
    D) Commodity Derivative
    View Answer
    Option B
    Some Extra:
    In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities.
    Equity options are the most common type of equity derivative.
  2. Which of the following is the class of derivative designed to separate and then transfer the risk of default on a debt that may arise from a borrower failing to make required payments?
    A) Property Derivative
    B) Interest Rate Derivative
    C) Credit Derivative
    D) Commodity Derivative
    View Answer
    Option C
    Some Extra:
    In finance, a credit derivative refers to any one of “various instruments and techniques designed to separate and then transfer the credit risk” or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.
  3. Which of the following is the class of derivative whose payments are determined through calculation techniques where the underlying benchmark product is an interest rate, or set of different interest rates?
    A) Equity Derivative
    B) Inflation Derivative
    C) Credit Derivative
    D) Interest Rate Derivative
    View Answer
    Option D
    Some Extra:
    In finance, an interest rate derivative (IRD) is a derivative whose payments are determined through calculation techniques where the underlying benchmark product is an interest rate, or set of different interest rates. There are a multitude of different interest rate indices that can be used in this definition.
  4. Which of the following is the class of derivative where the underlying assets are products like precious metals, agro products, energy products, etc?
    A) Freight Derivative
    B) Inflation Derivative
    C) Commodity Derivative
    D) Interest Rate Derivative
    View Answer
    Option C
    Some Extra:
    An exchange traded derivative or over the counter derivative with an underlying reference based on nonfinancial commodities including chemicals, energy, base and precious metals, livestock, grains, and softs is known as Commodity Derivative.
    For example, commodity derivatives are used by farmers and millers to provide a degree of “insurance.”
  5. Which of the following is the class of derivative which refers to an over-the-counter and exchange-traded derivative that is used to transfer inflation risk from one counterparty to another?
    A) Freight Derivative
    B) Inflation Derivative
    C) Weather Derivative
    D) Interest Rate Derivative
    View Answer
    Option B
    Some Extra:
    In finance, inflation derivative (or inflation-indexed derivatives) refers to an over-the-counter and exchange-traded derivative that is used to transfer inflation risk from one counterparty to another.
  6. Which of the following is the class of derivative where these financial instruments can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse conditions?
    A) Freight Derivative
    B) Property Derivative
    C) Commodity Derivative
    D) Weather Derivative
    View Answer
    Option D
    Some Extra:
    Weather derivatives are financial instruments that can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions.
  7. Which of the following group of derivatives contracts are traded directly between two parties, without going through an exchange or other intermediary?
    A) Exchange-traded derivatives
    B) Common-market derivatives
    C) Over-the-counter derivatives
    D) Forwards-exchange derivatives
    View Answer
    Option C
    Some Extra:
    Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary.
  8. Which of the following group of derivatives contracts are traded via specialized derivatives exchanges or other exchanges?
    A) Exchange-traded derivatives
    B) Common-market derivatives
    C) Over-the-counter derivatives
    D) Forwards-exchange derivatives
    View Answer
    Option A
    Some Extra:
    A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange. A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee.
    There are two groups of derivative contracts, which are distinguished by the way they are traded in the market — Over-the-counter (OTC) derivatives and Exchange-traded derivatives.
  9. Which of the following is a term used for a tailored contract between two parties, where payment takes place at a specific time in the future at today’s pre-determined price?
    A) Swaps
    B) Forwards   
    C) Futures 
    D) Options 
    View Answer
    Option B
    Some Extra:
    In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today, making it a type of derivative instrument
  10. Which of the following is a term used for a contract to buy or sell an asset on a future date at a price specified today?
    A) Swaps
    B) Forwards
    C) Futures
    D) Options
    View Answer
    Option C
    Some Extra:
    In finance, a futures contract (more colloquially, futures) is a standardized forward contract, a legal agreement to buy or sell something at a predetermined price at a specified time in the future.

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