Which of the following is an example of a financial derivative?

• A. A common stock
• B. A certificate of deposit
• C. A stock option contract
• D. A corporate bond

Answer: (C)

Verified step by step guidance

1. Understand the concept of a financial derivative: A financial derivative is a financial instrument whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, or currencies.
2. Analyze the options provided: A common stock represents ownership in a company and is not derived from another asset. A certificate of deposit is a fixed-income investment issued by banks and is not derived from another asset. A corporate bond is a debt instrument issued by companies and is not derived from another asset.
3. Focus on the stock option contract: A stock option contract is a financial derivative because its value is derived from the price of the underlying stock. It gives the holder the right, but not the obligation, to buy or sell the stock at a predetermined price within a specific time frame.
4. Clarify why the stock option contract is the correct answer: Unlike the other options, the stock option contract directly fits the definition of a financial derivative, as its value depends on the performance of the underlying stock.
5. Conclude the analysis: Based on the definition and characteristics of financial derivatives, the correct answer is the stock option contract.