Investment Funds in Canada (IFIC) Practice Exam

Derivatives are financial instruments that derive their value from the performance of an underlying asset, index, or rate. This underlying security can include stocks, bonds, commodities, interest rates, or foreign exchange rates. The key characteristic of derivatives is that their value is linked to the fluctuations in the price of the underlying asset, rather than being an investment in the asset itself. This means that derivatives can be used for various purposes, including hedging against risks, speculating on price movements, or enhancing portfolio returns.

The other options refer to different types of investments: tangible assets indicate physical items such as real estate or machinery, investments with fixed returns typically relate to bonds or fixed-income securities, and real estate investments specifically involve purchasing property. None of these options encapsulate the essence of what derivatives represent in the investment context, which centers on their reliance on an underlying asset’s value.