1. Which of the following statements is most likely to be correct about derivatives?

A. A derivative is a financial instrument that derives its value based on the performance of the underlying.
B. Derivatives are standardized financial instruments and cannot be customized.
C. The performance of a derivative is derived by replicating the performance of the underlying.


2. Which of the following is most likely to be a criticism of the derivatives market?

A. Derivatives provide price information but only at a cost of increasing transaction costs.
B. Derivatives are highly speculative instruments and effectively permit legalized gambling.
C. Default risk exists within all instruments of the derivative market.


3. Ali takes a long position in 50 futures contracts on Day 1. The futures have a daily price limit of €10 and closes with a settlement price of €105. On Day 2, the futures trade at €115 and the bid and offer move to €116 and €118, respectively. The futures price remains at these price levels until the market closes. The marked-to-market amount the trader receives in his account at the end of Day 2 is closest to:

A. €500.
B. €550.
C. €650.


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