- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 45. Derivative Markets and Instruments
- Subject 6. Purposes and Criticisms of Derivative Markets

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**CFA Practice Question**

Financial derivatives contribute to market completeness by ______.

B. increasing the number of possible payoffs

C. increasing the number of investors participating in the market

A. reducing transaction costs

B. increasing the number of possible payoffs

C. increasing the number of investors participating in the market

Correct Answer: B

Derivatives offer unique payoff patterns and can be combined with other instruments to create new and unique payoff patterns that did not exist before. As a result, derivatives allow markets to offer more possible payoff patterns and to become more complete.

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**User Contributed Comments**
3

User |
Comment |
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Vikku |
Could someone pls elaborate with an example? |

georgek |
the definition of market completeness the answer elaborated is interesting as it also implied the reduction of txn costs given the combination with other instruments? |

ankurwa10 |
What did i say in my comment to the previous question :P |