a) Why is this course called financial derivatives? Derivatives have become increasingly important in the finance, derivatives have entered into the financial institution, fund managers and corporate treasures in over the counter market etc derivatives market is hugemuch bigger than the stock market when measured in terms of underlying assets. So derivatives align together with finance which helps in knowing how derivatives works, how they are used, how they are priced. b) Why do we use derivatives? Derivatives can be used for hedging or speculation or arbitrage. They can be used to transfer a wide range of risks in the economy from one entity to another. c) Compare and contrast forwards with futures Forward contracts: It is an agreement to buy or sell an asset at a certain future time for a certain price. A forward contract is traded in the over-the-counter marketusually between two financial institutions or between a financial institution and one of its clients. Futures contracts: is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Forward contracts can be used to hedge foreign currency risk while future contacts are traded on exchange d) Compare and contrast options with futures They are two types of options call option which gives the holder the right to buy the underlying asset by a certain date for a certain price. A put option gives the holder the right to sell the stock price. Options gives the holder the right to do something. The holder does not have to exercise this right. e) Options, futures, forwards and swaps are called derivative instruments. Why do we call them derivatives? Because their value depend/derives from the value of other, more basic, underlying variables Which in most cases the variables underlying derivatives are the prices of traded assets. A stock option.