Final answer:
A repurchase agreement is not an example of a derivative. Derivatives get their value from underlying assets or events, whereas repurchase agreements are forms of short-term borrowing and not dependent on the value of other assets.
Step-by-step explanation:
The student's question is about identifying which among a given list of financial instruments is not an example of a derivative. A derivative is a financial security whose value is dependent upon or derived from an underlying asset or group of assets. The classic examples of derivatives include stock options, futures contracts, and credit default swaps. These instruments derive their value from the performance of assets like stocks, commodities, indexes, or events, such as the default of a loan.
In the list provided:
- Stock options are contracts that give the holder the right to buy or sell shares of a stock at a predetermined price within a specified time frame, making them a classic type of derivative.
- Interest-only strips (IO strips) are securities that represent the interest portion of mortgage payments from a pool of mortgages. They are derivatives because their value is based on mortgage payments.
- Debt instruments backed by pools of mortgages, commonly known as mortgage-backed securities (MBS), are also derivatives as their value is contingent on the performance of the mortgage pool.
- Finally, repurchase agreements (repos) are short-term borrowing arrangements where one party sells securities to another with an agreement to repurchase them at a later date and a higher price. Unlike the others, repos are not derivatives but rather a form of secured short-term borrowing.
Thus, repurchase agreements are the correct answer as they do not fit the definition of a derivative.