MBA Introduction Derivatives Market Definition Very Short Question Answer

MBA Introduction Derivatives Market Definition Very Short Question Answer

MBA Introduction Derivatives Market Definition Very Short Question Answer

MBA Introduction Derivatives Market Definition Very Short Question Answer
MBA Introduction Derivatives Market Definition Very Short Question Answer

Introduction to derivatives market; Definition, Evolution and features of derivatives, Types of derivatives, Forward, future and Options market, Forward market transactions, Forward contracts, Forward market in India, Hedging with forwards.

MBA Introduction Derivatives Market Definition Very Short Question Answer

Section A


Qus.1. What is forward contract?

Ans. A forward contract is an agreement to buy or sell an asset on a specified date for a specifie


Qus.2. Where are forward contracts traded?

Ans. Forward contracts are normally traded outside stock exchanges. They are popular on ti Over The Counter (OTC) market.

Qus.3. What is futures contract?

Ans. A futures contract is an agreement between two parties to buy or sell an asset at a certain ti in the future, at a certain price.

Qus.4. What is future price?

Ans. The price at which the futures contract trade in the future market is called the future price

Qus.5. What is currency future?

Ans. A currency future is a futures contract to exchange one currency for another at a specified d in the future at a price (exchange rate) that is fixed on the purchase date.

 Qus.6. What are the types of futures?

Ans. The different types of futures contract traded fundamentally fall into four dfferent categor based on the underlying assists. The underlying assets may be:

  1. A foreign currency (say Euro, Yen or Swiss Franc, etc.)
  2. An interest-earning asset (say a debenture or time deposit)
  3. An Index (usually a stock index)
  4. A physical commodity (say wheat, corn, etc.)
  5. Futures on individual stock.

Qus.7. What are financial derivatives?

Ans. Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risk can be traded in financial mar in their own right.

MBA Introduction Derivatives Market Definition Question Answer

Qus.8. Define derivatives.

Ans. According to the Securities Contracts (Regulation) Act 1956, ‘derivative’ includes:

  1. A security derived from a debt instrument, share, loan whether secured or unsecured, instrument or contract for differences or any other form of security.
  2. .A contract which derives its value from the prices or index of prices of underlying securities Therefore, a derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forward and Swaps.

Qus.9. What is forward market?

Ans. A market in which contracts are made to buy or sell currencies, commodities, etc. at some future date at a price fixed at the date of contract.

Qus .10. What is futures market? A forward

Ans. A futures market is an auction market in which participants buy or sell commodity and future contract for delivery on a specified future date

Qus.11. What is option market? well as goods.

Ans. The option market refers to the sum of all the buying and selling of option contracts which is conducted and may be described either on a global or a regional basis.

Qus.12. What is swap market?

Ans. Swap market is that market in which a borrower with one type of loan exchanges it with another borrower with a different type of loan.

Qus.13. Categories the traders in derivatives market.

Ans. Traders in derivatives market may be classified into following categories:

  1. Hedgers,
  2. Speculators,
  3. Arbitrageurs,
  4. Scalpers,
  5. Banks, financial institutions and NBFCs.
  6. Mutual funds and insurance companies.

Qus.14. What do you mean by underlying assets?

Ans. Underlying assets refer to the assets on which forward contract is made. The various underlying assets are equity shares, stock indices, commodity, currency, interest rate, etc.

Qus.15. What is Hedging?

Ans. Hedging is a process of mitigating investment risk posed due to exposure in high risk asset classes such as stocks and derivatives, etc. Q.16. Which formula is used for calculating long and short forward contract? Ans. Formula for all long forward contract:

f = (Fo-k)e-rt

Formula for all short forward contract:

f=(k – F0)e-rt

where, f = Current value of forward contract,

Fo = Forward price agreed upon today,

k = Delivery price for a contract negotiated some time ago,

r = Risk-free interest rate,

T = Delivery date.

Qus.17. What is cash settlement?

Ans. Cash settlement is a method of settling forward contracts or future contracts by cash rather than by physical delivery of the underlying asset

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