Which of the following statements best defines a derivative financial instrument?

1. Its value is derived from an underlying primary instrument, it requires little initial investment and it is settled at a future date
2. Its value is derived from an underlying primary instrument, it requires substantial initial investment, and it is settled at a future date
3. Its value is derived from an underlying primary instrument, it requires little initial investment, and it is exercised immediately
4. Its value is derived from the stock market, it requires little initial investment, and it is settled at a future date.

X Company granted its executives options to purchase 30,000 shares at $30 each. An option price model valued the options at $120,000. Options vest over 3 years. When the share price was $35, 10,000 options were exercised. What is the amount of cash inflow to be reported in the financing section of the statement of cash flows related to this transaction?

1. $120,000
2. $300,000
3. $350,000
4. $390,000.