Financial Products

Question 1

Currency

Answer 1

Medium of exchange, unit of account, store of value. Risks: Inflation/purchasing-power risk and FX risk.

Question 2

Deposit Accounts

Answer 2

You lend cash to a bank for interest. Risks: Interest-rate risk and bank default risk.

Question 3

Loans

Answer 3

Principal advanced today, repaid with interest over time. Risks: Credit risk and liquidity risk.

Question 4

Bonds

Answer 4

Tradable loan with coupons and face value. Risks: Credit risk, market/interest-rate risk, liquidity risk.

Question 5

Stocks (Equities)

Answer 5

Ownership claim on a firm’s residual cashflows. Risks: Market risk and dividend risk.

Question 6

Insurance

Answer 6

Premium for indemnification against losses. Risks: Underwriting risk, market risk, liquidity risk.

Question 7

Forwards

Answer 7

Obligation to trade asset at a future price. Risks: Full spot-price exposure and counterparty risk.

Question 8

Options

Answer 8

Right (not obligation) to buy/sell at strike. Risks: Premium loss, volatility risk, time decay.

Question 9

Swaps

Answer 9

Exchange of cashflow streams (fixed vs floating). Risks: Interest-rate risk and counterparty risk.

Question 10

Exotic Derivatives (Digitals, Choosers)

Answer 10

Payoffs with non-linear/path-dependent features. Risks: Model and calibration risk, market risk.