Which of the following is true of a financial derivative?
A) The price of a derivative is independent of its supply in the market.
B) Derivatives can be used to multiply gains or losses from an asset.
C) Derivatives are not traded on exchanges and so cannot be regulated.
D) Derivatives can also be traded without any underlying asset.

Question

Quizplus · Accepted Answer

Derivatives can be used to amplify the financial outcome (either gains or losses) associated with movements in the underlying asset's price. This leverage effect is a fundamental characteristic of derivatives, allowing investors to speculate on price movements or hedge against them.

Which of the Following Is True of a Financial Derivative