$1$ What are forward contracts?

$2$ Discuss two major differences between futures and forward markets.

$3$ Explain the implications for an option writer if they elect to write a covered option instead

of a naked option.

Discussion

$1.$ Derivatives can increase liquidity in any given market by increasing turnover and trading

depth.

a$.$ True

b$.$ False

$2.$ By taking a position in a derivative security that offsets the firm's risk profile, the firm can

limit how much its value is affected by changes in the risk factors.

a$.$ True

b$.$ False

$3.$ Speculators can be described as individuals or firms that engage in financial$-$market

transactions to reduce price risk.

a$.$ True

b$.$ False

$4.$ Share$-$index futures can be used to control the unsystematic risk in an investor's portfolio.

a$.$ True

b$.$ False

$5.$ Margin requirements relate to the amount of cash down payment or equity one must have

deposited before participating in any trade.

a True

b$.$ False