Canadian Securities Course (CSC) Level 1 Practice Exam

Who are the 4 main participants in derivative contracts?

1. Individual Investors.

2. Derivative Dealers.

3. Business and Corporations.

4. Institutional Investors.

The correct answer is: Institutional Investors.

The primary participants in derivative contracts encompass a variety of entities, all of which play significant roles in the derivatives market. While institutional investors are indeed crucial players due to their substantial capital and sophisticated trading strategies, the most accurate understanding includes all relevant parties involved. The four main participants in derivative contracts typically include individual investors, derivative dealers, businesses and corporations, and institutional investors. Each of these groups engages with derivatives for different reasons, such as hedging against risk, speculating on price movements, or facilitating transactions that require leverage. Individual investors often partake in derivatives to manage personal investment risks or seek potential returns. Derivative dealers provide liquidity to the market by creating and trading derivative products, thus connecting buyers and sellers. Businesses and corporations might use derivatives to hedge against various types of risk, such as currency fluctuations or commodity prices, essential for managing operational risks. Finally, institutional investors leverage derivatives to optimize their portfolios, manage risk exposures, and participate in price discovery. Therefore, while institutional investors are indeed a vital segment of the derivatives market, the complete picture encompasses all four groups, each contributing uniquely to the functioning and dynamism of derivative contracts.