Which term is defined as a financial asset whose resale value depends on the value of other financial assets?

• A. Derivative
• B. Stock option
• C. Bond
• D. Equity

Answer: (A)

The concept being tested is that some financial assets don’t have value on their own; their price is derived from the value of another asset. Instruments with this feature are called derivatives. A derivative’s value moves with the price of an underlying asset, which can be a stock, a bond, an interest rate, a currency, or an index, among others. This relationship explains why the resale value isn’t based on the instrument’s own features but on the value of something linked to it. For example, a stock option is a type of derivative, illustrating how a derivative can take many forms, all tied to another asset’s value. In contrast, a bond is a debt instrument with fixed cash flows, and equity represents ownership, neither of which derives value from another asset in the same way.