CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
Which description of a derivative's underlying is most accurate?
The underlying is the asset or variable whose value determines the derivative's payoff, such as a stock, bond, commodity, index or interest rate. It is distinct from the option premium paid at initiation and from the expiration date of the contract.
- AIt is the asset or variable whose value determines the derivative's payoff.Correct
- BIt is the premium the buyer pays to the seller at initiation.
- CIt is the date on which the contract is settled or expires.
Explanation
The underlying is the asset, rate, index or other variable from which a derivative's value is derived. The premium is the option price, and the expiration is the contract's maturity date.
Did you get it right without looking?
One question tells you little. A timed set on Derivative Benefits, Risks, and Issuer and Investor Uses shows your real accuracy, how long you take and where you lose marks.
More Derivative Benefits, Risks, and Issuer and Investor Uses questions
- Which statement about the role of a clearinghouse in derivatives markets is most accurate?
- An airline wants to protect against a rise in jet fuel prices but also wishes to retain the benefit if fuel prices fall, and is willing to p…
- Compared with using exchange-traded futures, an issuer that hedges a specific exposure with an over-the-counter forward contract most likely…
- A pension fund wants to create an exposure to an asset class that is costly to access directly because of high trading frictions and restric…
- Which statement best describes how derivatives contribute to market efficiency?
- A corporation has floating-rate bank debt and expects interest rates to rise. It wants predictable interest costs without refinancing the lo…