Discuss CSI CSC1 Exam Topic 2 Question 4

What financial instrument is derived from the value of an underlying asset?

AReal estate investment trust

BForward contract

CPreferred share.

DInflation linked bond

Suggested Answer: B

A forward contract is a derivative instrument whose value is derived from the value of an underlying asset, such as commodities, currencies, or financial instruments. It is a customized agreement between two parties to buy or sell an asset at a future date at a specified price.

Why Other Options are Incorrect:

A . Real estate investment trust: A REIT is an equity instrument tied to real estate assets, not a derivative.

C . Preferred share: A preferred share is an equity security with fixed dividends, not a derivative.

D . Inflation-linked bond: These are fixed-income securities linked to inflation rates but are not considered derivatives.

Reference: CSC Volume 1, Chapter 10, 'The Role of Derivatives -- Forward Contracts' describes forwards as derivatives dependent on underlying assets.

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12 comments · newest first

Tawny 10 days ago

I’m not so sure. What about A) Real estate investment trust? It’s also linked to assets.

Elmer 15 days ago

I agree! Forward contracts are definitely derived from asset values.

Flo 20 days ago

I think it's B) Forward contract. It’s based on underlying assets.

Caren 25 days ago

C) Preferred share is also a contender, but I lean towards B.

Lavonda 1 month ago

Wait, are we sure about that? Sounds too simple.

Micah 1 month ago

I agree with B, it’s the right choice!

Ashanti 1 month ago

I thought it was A) Real estate investment trust.

Devorah 2 months ago

Definitely B) Forward contract!

Laura 2 months ago

I practiced a similar question about derivatives last week, and I think it was definitely about forward contracts being derived from underlying assets.

Lizette 2 months ago

I’m a bit confused; I thought preferred shares could also be linked to underlying assets somehow?

Sheron 2 months ago

I remember studying derivatives, and I feel like forward contracts are definitely related to underlying assets.

Herminia 2 months ago

I think the answer might be B) Forward contract since it's a type of derivative, but I'm not entirely sure.

CSI CSC1 Exam - Topic 2 Question 4 Discussion