A Derivative Security Is a Financial Asset That

question 254

Multiple Choice

A derivative security is a financial asset that:

• A) Reduces a firm's exposure to price fluctuations.
• B) Derives its value from the government guarantee underlying the security.
• C) Is valued based on its claim on another financial asset.
• D) Is issued only by firms involved in the banking industry.
• E) Has a value which moves inversely to the underlying asset.

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Definitions:

Expected Total Cash Flows

The anticipated sum of all cash inflows and outflows associated with an investment over a specific period.

Salvage Value

The estimated residual value of an asset at the end of its useful life, reflecting what it could be sold for or scrapped.

Net Present Value

This is the difference between the present value of cash inflows and the present value of cash outflows over a period of time, used to assess the profitability of an investment.

Original Investment

The initial amount of money put into a project, asset, or company, intended to generate earnings or profit.