- 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**

Imagine a fictional derivative that can, when combined with certain other financial instruments, pay $100,000 each time a Democrat is elected President of the U.S. This fictional derivative has ______.

A. decreased market completeness because the payoff described can only be achieved in combination with other financial instruments

B. left market completeness unchanged because the payoff described can only be achieved in combination with other financial instruments

C. increased market completeness even though the payoff described can only be achieved in combination with other financial instruments

**Explanation:**Since the addition of the imaginary derivative has made a payoff pattern possible where it was previously impossible, the derivative has made the market more complete.

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**User Contributed Comments**
5

User |
Comment |
---|---|

poojacfa |
Purposes of derivative markets: Price discovery, Risk management, Market completeness, Market efficiency & Trading efficiency. |

smit0745 |
how do we know it was previously impossible? |

gulfa99 |
Complete market.right..thats why we see most of the US and european banks collapsing. Banks without derivative open positions are million times better off. |

ecj66 |
Ummm...misleading and fictional. Dems take money from you. |

ctschro |
ecj66 - derivatives can be used for hedging |