Canadian Securities Course (CSC) Level 1 Practice Exam

What type of derivatives are standardized?

1. Livestock and meat.

2. Forest, fiber, and food.

3. Precious and industrial metals.

4. Exchange-traded Derivatives.

The correct answer is: Exchange-traded Derivatives.

The correct response identifies exchange-traded derivatives as standardized derivatives. This type of derivative is traded on organized exchanges and adheres to specific regulations and uniformity in terms of contract specifications, such as size, expiration dates, and pricing. The standardization facilitates liquidity and transparency, making it easier for market participants to transact. In contrast, the other options involve physical commodities or types of derivatives that may not be standardized in the same regulated manner. Livestock and meat, forest, fiber, and food, and precious and industrial metals can involve various contracts that are often tailored to specific needs of buyers and sellers, leading to a lack of standardization. This variability can result in less liquidity and potentially more complex trading scenarios. Therefore, the distinctive characteristic of exchange-traded derivatives is their standardization, which enhances market efficiency.