Standardization of Derivative Contracts

question 3

Multiple Choice

Standardization of derivative contracts:

• A) results in increased risk for the parties involved.
• B) makes them more difficult to understand and therefore leads to increased misuse.
• C) makes the premiums involved with these contracts increase.
• D) leads to greater liquidity and lower risk.

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Definitions:

Market Price

The price at which a product or service is traded in the competitive marketplace.

Put Provision

A clause found in certain securities that allows the holder to force the issuer to repurchase the security at specified prices before maturity.

Fixed Rate Bond

A bond that pays a predetermined interest rate to investors for the entire term of the bond.

Fallen Angel

Originally investment-grade bonds that have been downgraded to junk bond status due to the issuer's weakened financial condition.