Which of the following best describes derivatives?

Which of the following best describes derivatives?

• A. Financial contracts with values tied to underlying assets
• B. Investment portfolios managed by financial advisors
• C. Types of insurance for financial risks
• D. Shares of stock issued by a corporation

Answer: (A)

The best description of derivatives is that they are financial contracts with values tied to underlying assets. Derivatives derive their value from the price movements of these underlying assets, which can include stocks, bonds, commodities, currencies, or interest rates. This attribute allows derivatives to serve various purposes, such as hedging risks, speculating on price movements, or enhancing portfolio returns. In contrast, the other options describe different financial concepts. Managed investment portfolios involve a group of assets selected and overseen by financial advisors, which is separate from the specific nature of derivatives. Insurance types are designed to mitigate financial risks in a different manner, focusing on risk management rather than creating contracts based on asset values. Shares of stock represent ownership in a corporation and do not have the characteristics of derivatives, as they do not derive their value from other assets in the way that derivatives do. Thus, the definition accurately captures the essence and function of derivatives in the financial market.

The best description of derivatives is that they are financial contracts with values tied to underlying assets. Derivatives derive their value from the price movements of these underlying assets, which can include stocks, bonds, commodities, currencies, or interest rates. This attribute allows derivatives to serve various purposes, such as hedging risks, speculating on price movements, or enhancing portfolio returns.

In contrast, the other options describe different financial concepts. Managed investment portfolios involve a group of assets selected and overseen by financial advisors, which is separate from the specific nature of derivatives. Insurance types are designed to mitigate financial risks in a different manner, focusing on risk management rather than creating contracts based on asset values. Shares of stock represent ownership in a corporation and do not have the characteristics of derivatives, as they do not derive their value from other assets in the way that derivatives do. Thus, the definition accurately captures the essence and function of derivatives in the financial market.