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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

Which of the following best describes a 'derivative' in the context of the securities market?

A derivative is a contract whose value is derived from an underlying asset such as a share, index, commodity or interest rate. It is not a capital-raising security, a bank deposit or a class of shares; its price moves with the underlying.

  1. AA contract whose value is derived from the value of an underlying asset such as a share, index or commodityCorrect
  2. BA security issued by a company to raise long-term capital from the public
  3. CA deposit instrument issued by a bank with a fixed maturity
  4. DA share that carries differential voting rights

Explanation

A derivative is a contract whose value depends on, or is derived from, an underlying asset or reference rate. The other options describe equity issuance, bank deposits and shares with differential voting rights, none of which are derivatives.

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