Question

All of the following are characteristics of a derivative financial instrument except the instrument?

1) has one or more underlyings and an identified payment provision.
2) requires a large investment at the inception of the contract.
3) requires or permits net settlement.
4) All of these are characteristics.

Answer 1

A derivative financial instrument does not require a large investment at the inception of the contract.

Step-by-step explanation:

An investment that has one or more underlyings and an identified payment provision, requires or permits net settlement, and does not require a large investment at the inception of the contract is a derivative financial instrument. So, the correct answer to the question is 2) requires a large investment at the inception of the contract. This option is not a characteristic of a derivative financial instrument because derivatives can be bought and sold with relatively small initial investments.