Which financial instruments are classified as derivative securities?

Which financial instruments are classified as derivative securities?

• A. Common stocks and bonds
• B. Options and futures
• C. Money market accounts and CDs
• D. Exchange-traded funds only

Answer: (B)

Derivative securities are financial instruments whose value is derived from the value of an underlying asset, index, or rate. Options and futures are classic examples of such instruments. An option grants the holder the right, but not the obligation, to buy or sell an asset at a predetermined price before a specific date. Futures, on the other hand, are contracts to buy or sell an asset at a predetermined price at a future date, obligating both parties to the transaction. These instruments provide investors with opportunities for hedging, speculation, and leveraging, which is why they play a crucial role in financial markets. Understanding derivatives is fundamental for anyone studying the securities industry, as they affect pricing and risk management strategies across different asset classes.

Derivative securities are financial instruments whose value is derived from the value of an underlying asset, index, or rate. Options and futures are classic examples of such instruments. An option grants the holder the right, but not the obligation, to buy or sell an asset at a predetermined price before a specific date. Futures, on the other hand, are contracts to buy or sell an asset at a predetermined price at a future date, obligating both parties to the transaction.

These instruments provide investors with opportunities for hedging, speculation, and leveraging, which is why they play a crucial role in financial markets. Understanding derivatives is fundamental for anyone studying the securities industry, as they affect pricing and risk management strategies across different asset classes.