CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
The price of a derivative's underlying is most likely to be described by which of the following?
An underlying can be an asset or a variable such as an equity index, interest rate, currency or credit event, and many derivatives settle in cash instead of physical delivery. It is not restricted to deliverable commodities or to securities issued by the counterparty.
- AOnly a physical commodity that can be delivered at expiration
- BA variable such as an equity index, interest rate or credit event, which may be settled in cashCorrect
- COnly a security issued by the counterparty writing the contract
Explanation
Underlyings can be assets or variables including indexes, rates, currencies or credit events, and many contracts settle in cash rather than by delivery. The other options wrongly limit the underlying to physical goods or to the writer's own securities.
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