What typically influences the price of a derivative?

What typically influences the price of a derivative?

• A. The underlying asset's price
• B. The savings account interest rates
• C. The bank's credit rating
• D. The performance of the economy as a whole

Answer: (A)

The price of a derivative is primarily influenced by the price of the underlying asset. Derivatives are financial instruments whose value is derived from the performance of an underlying asset, such as stocks, bonds, commodities, or market indices. As the price of the underlying asset fluctuates, it directly affects the value of the derivative. For example, in the case of options, the option's price will change as the stock price changes, reflecting the potential profit or loss from exercising the option based on the current value of the stock. Other factors, such as time until expiration, volatility, and interest rates, may also play a role in determining a derivative's price, but the underlying asset's price is the most significant determinant. This foundational relationship is why the underlying asset's price is considered the main influence on the pricing of derivatives.

The price of a derivative is primarily influenced by the price of the underlying asset. Derivatives are financial instruments whose value is derived from the performance of an underlying asset, such as stocks, bonds, commodities, or market indices. As the price of the underlying asset fluctuates, it directly affects the value of the derivative. For example, in the case of options, the option's price will change as the stock price changes, reflecting the potential profit or loss from exercising the option based on the current value of the stock.

Other factors, such as time until expiration, volatility, and interest rates, may also play a role in determining a derivative's price, but the underlying asset's price is the most significant determinant. This foundational relationship is why the underlying asset's price is considered the main influence on the pricing of derivatives.