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Unit 1: Introduction to Derivatives

Swaps: Swaps are private agreements between two parties to exchange cash flows in the future Notes
according to a prearranged formula.

1.8 Review Questions

1. Explain the term ‘derivatives’, using suitable examples.
2. What are the underlying assets for a derivative instrument?
3. What are the products of derivatives?
4. Discuss the participants of derivatives in the trading context.
5. Explain the different types of derivatives along with their features, in brief.

6. ‘Derivatives are effective risk management tools’. Comment on the statement.
7. ‘Future contracts are obligations, whereas options are rights’. Do you agree?
8. Bring out the similarities and dissimilarities between Forwards, Futures, Options and
Swaps.
9. Can you think of a cash market in which options or futures could be useful but does not yet
exist? Explain.

10. Highlight the various functions of derivatives.
11. What is Exchange-traded and over the contract derivatives?
12. Briefly, explain the Exchange-traded vs. OTC derivatives markets.

Answers: Self Assessment

1. Financial contracts 2. Ownership

3. Contract 4. True
5. True 6. False
7. Commodity 8. Financial
9. Forward 10. Certain price

11. Option 12. Swaps
13. Portfolios 14. False
15. True

1.9 Further Readings

Books Anderson, R W and K McKay (2008): Derivatives Markets, in Freixas, X, P
Hartmann and C Mayer (eds), Handbook of European Financial Markets and
Institutions, Oxford University Press, Oxford, UK.
Apte, P.G., International Financial Management, Tata McGraw-Hill Publishing

Chance, Don M. An Introduction to Derivatives, Dryden Press, International
Edition

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