Canadian Securities Course (CSC) Level 1 Practice Exam

What is a derivative?

1. A financial contract between two parties whose value is derived from the value of an underlying asset.

2. The value of certainty aka the portion of the option contract that is ITM.

3. It is the value of uncertainty. Calculated as The option's premium minus the intrinsic value.

4. The value of assets traded on the stock exchange.

The correct answer is: A financial contract between two parties whose value is derived from the value of an underlying asset.

The correct answer describes a derivative as a financial contract between two parties whose value is derived from the value of an underlying asset. This definition captures the essence of derivatives, which are financial instruments that derive their worth from the performance of an underlying asset, such as stocks, bonds, commodities, or indices. Derivatives can take various forms, including options, futures, and swaps, and are used for a variety of purposes, including hedging risk, speculating on price movements, or arbitraging price discrepancies. In contrast, the other choices do not accurately define what a derivative is. They focus on specific aspects of financial options or the broader concept of asset valuation rather than encapsulating the fundamental nature of derivative contracts. While the other options may relate to elements of trading and pricing in financial markets, they do not appropriately align with the definition of a derivative in its broadest sense.