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Answers

Chapter 4

Example 1

A derivative is a financial instrument or certain other contract which has
which THREE of the following characteristics?

A it requires little or no initial investment

B it is a highly probable forecast transaction

C it gives the right, but not the obligation, to trade

D it is settled at a future date

E its value changes in response to the change in a specified rate or index

Solution

The answer is (A), (D) and (E).

A highly probable transaction (B) is a hedged item not a derivative.

Point (C) relates to an option, which admittedly is a type of derivative, but all
derivatives don't have to have this characteristic.

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