Financial Instruments Flashcards

What is a futures contract?

Answer: A legally binding agreement to buy or sell a specific asset at a predetermined price on a specific future date

A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an asset at a predetermined price on a specific future date. Both parties are obligated to fulfill the contract.

What distinguishes an option from a futures contract?

Answer: An option gives the buyer the right, but not the obligation, to buy or sell; a futures contract obligates both parties

An option gives the buyer the right (but not the obligation) to buy (call) or sell (put) an asset at a specified price before expiry. A futures contract obligates both the buyer and seller to transact at the agreed price.

What is a 'call option'?

Answer: An option to buy an asset at a specified price (strike price) before expiration

A call option gives the holder the right to buy an underlying asset at the strike (exercise) price before or on the expiration date. Buyers profit when the asset price rises above the strike price.

What is a 'put option'?

Answer: An option to sell an asset at a specified price (strike price) before expiration

A put option gives the holder the right to sell an underlying asset at the strike price before or on the expiration date. Buyers profit when the asset price falls below the strike price.

What is a mutual fund?

Answer: A pooled investment vehicle that collects money from many investors and invests in a diversified portfolio of securities

A mutual fund pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers make investment decisions, and returns/losses are shared among investors.

What does 'liquidity' mean for a financial instrument?

Answer: How easily and quickly an instrument can be bought or sold without significantly affecting its price

Liquidity refers to how quickly and easily a financial instrument can be converted to cash without a significant price change. Highly liquid instruments (like major stocks) can be traded quickly; illiquid instruments (like some bonds) cannot.