INTRODUCTION TO DERIVATIVES AND RISK
MANAGEMENT REVISION HANDBOOK 2026
RISK MANAGEMENT TECHNIQUES AND
FINANCIAL INSTRUMENTS
◉ repurchase agreement. Answer: A securities transaction in which
an investor sells a security and promises to repurchase it a specified
number of days later at a higher price reflecting the prevailing
interest rate.
◉ repo. Answer: Another word for repurchase agreement
◉ return. Answer: A measure of the increase in wealth from an
investment.
◉ dollar return. Answer: An option to buy an asset, currency, or
futures. Also refers to the early retirement of a bond.
◉ percentage return. Answer: A measurement of an investment's
performance computed as the return per dollar invested
◉ risk. Answer: In the financial sense, a measure of the variability or
uncertainty of a transaction or portfolio.
,◉ risk-free rate. Answer: The return offered by an investment in an
asset with no risk.
◉ risk-return trade-off. Answer: The concept in which additional
risk must be accepted to increase the expected return
◉ theoretical fair values. Answer: The true or appropriate worth of
an asset or derivative, which is obtained from a model based on
rational investor behavior and the absence of arbitrage
opportunities.
◉ market efficiency. Answer: A concept referring to a market in
which prices reflect the true economic values of the underlying
assets.
◉ arbitrage. Answer: A transaction based on the observation of the
same asset or derivative selling at two different prices. The
transaction involves buying the asset or derivative at the lower price
and selling it at the higher price.
◉ law of one price. Answer: The principle that two identical assets
or portfolios cannot sell for different prices.
, ◉ hedge. Answer: A strategy used to reduce or offset the risk of loss
in an investment by taking an opposite position in a related asset
(often using derivatives like futures, options, or swaps).
◉ speculate. Answer: A strategy that involves taking on risk
intentionally in order to profit from expected price movements in a
financial market
◉ nearby contract. Answer: The futures contract that is closest to
maturing when compared to other futures contracts on the same
exchange and the same commodity.
◉ premium. Answer: A fee the buyer pays the seller; the option's
price.
◉ exercise price. Answer: The price at which an option permits its
owner to buy or sell the underlying security, futures, or currency.
◉ strike/strike price. Answer: another word for exercise price
◉ expiration date. Answer: The date after which a derivative
contract no longer exists. Also known as the expiration.
MANAGEMENT REVISION HANDBOOK 2026
RISK MANAGEMENT TECHNIQUES AND
FINANCIAL INSTRUMENTS
◉ repurchase agreement. Answer: A securities transaction in which
an investor sells a security and promises to repurchase it a specified
number of days later at a higher price reflecting the prevailing
interest rate.
◉ repo. Answer: Another word for repurchase agreement
◉ return. Answer: A measure of the increase in wealth from an
investment.
◉ dollar return. Answer: An option to buy an asset, currency, or
futures. Also refers to the early retirement of a bond.
◉ percentage return. Answer: A measurement of an investment's
performance computed as the return per dollar invested
◉ risk. Answer: In the financial sense, a measure of the variability or
uncertainty of a transaction or portfolio.
,◉ risk-free rate. Answer: The return offered by an investment in an
asset with no risk.
◉ risk-return trade-off. Answer: The concept in which additional
risk must be accepted to increase the expected return
◉ theoretical fair values. Answer: The true or appropriate worth of
an asset or derivative, which is obtained from a model based on
rational investor behavior and the absence of arbitrage
opportunities.
◉ market efficiency. Answer: A concept referring to a market in
which prices reflect the true economic values of the underlying
assets.
◉ arbitrage. Answer: A transaction based on the observation of the
same asset or derivative selling at two different prices. The
transaction involves buying the asset or derivative at the lower price
and selling it at the higher price.
◉ law of one price. Answer: The principle that two identical assets
or portfolios cannot sell for different prices.
, ◉ hedge. Answer: A strategy used to reduce or offset the risk of loss
in an investment by taking an opposite position in a related asset
(often using derivatives like futures, options, or swaps).
◉ speculate. Answer: A strategy that involves taking on risk
intentionally in order to profit from expected price movements in a
financial market
◉ nearby contract. Answer: The futures contract that is closest to
maturing when compared to other futures contracts on the same
exchange and the same commodity.
◉ premium. Answer: A fee the buyer pays the seller; the option's
price.
◉ exercise price. Answer: The price at which an option permits its
owner to buy or sell the underlying security, futures, or currency.
◉ strike/strike price. Answer: another word for exercise price
◉ expiration date. Answer: The date after which a derivative
contract no longer exists. Also known as the expiration.
