In a derivative transaction:
A)The dollar amount of the transaction increases as the contract date approaches.
B)The risk is less than if actually purchasing the underlying asset.
C)What one person gains is what the other person loses.
D)There is always a futures contract.

Question

Quizplus · Accepted Answer

In a derivative transaction, one party gains only if the other party loses. Derivatives contracts involve no inherent value on their own; their value is derived from an underlying asset like stocks or commodities. Therefore, the buyer hopes that the price of the underlying asset will increase, while the seller hopes that it will decrease. This means that in a derivative transaction, one party's gain is necessarily equal to the other party's loss.

A, B, and D are all incorrect. The dollar amount of the derivative transaction can increase or decrease depending on market conditions, and the risk of a derivative transaction can be higher than buying the underlying asset if not properly managed. Also, a derivative transaction doesn't need to involve a futures contract; it can be any type of financial instrument that derives its value from an underlying asset.

In a Derivative Transaction