A risk manager at a financial institution is presenting a seminar to recently hired junior analysts. The seminar's focus is on explaining derivative contracts, their key characteristics, and their use by entities within the financial markets. As part of the presentation, the risk manager makes several statements about derivative contracts. Which of the following statements, if made by the manager, would accurately describe derivative contracts?

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A derivative contract allows a transfer of risks that is beneficial to both parties in the contract.

67.0%

Speculators use derivative contracts traded on exchanges, while hedgers use contracts traded in over-the-counter markets.

11.3%

Complex derivatives created with mortgages by banks in the years leading up to the 2007 - 2009 global financial crisis limited demand for housing and reduced the severity of the crisis.

10.4%

Derivative contracts such as forwards, futures, or options have linear payoff functions that depend on the value of the underlying asset.

11.3%

Financial Risk Manager Part 1

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