(a) What are derivative instruments? (5 marks)
(b) Explain the types of derivative instruments. (10 marks)
(c) What are the advantages and disadvantages of using derivative instruments? (10 marks)
(a) Derivatives are financial instruments that derive their value in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices.
(b) The most common types of derivatives are forwards, futures, options, and swaps. The most common underlying assets include commodities, stocks, bonds, interest rates, and currencies.
Disadvantages of using derivative instruments: