Derivatives — Free Practice Questions

Why: A derivative is a contract that derives its value from the value or performance of an underlying — an asset, interest rate, exchange rate, or index — so its payoff is contingent on how that underlying behaves. Being priced solely by its own supply and demand describes a standalone asset, not a derivative, and a direct ownership claim on a firm's cash flows describes equity rather than a derivative, whose value instead changes as the underlying moves.

Why: Derivative contracts are defined by common features: an identified underlying, a contract size or notional amount, and a stated settlement or expiration date that fixes when the payoff is determined. Paying the full price of the underlying upfront is characteristic of a cash purchase rather than a derivative, which typically requires little or no initial outlay, and most derivatives settle on value differences rather than transferring ownership of the underlying at initiation.