A. Read the article on derivatives and complete it using the words from the box.

clients risk hedge shares insurance

investment commodities underlying economic investors
contracts speculate instruments business buyers

NEWS: Buffett warns on investment 'time bomb' (BBC News Online)

The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the
economy and most (1)………….………..are still "too expensive", legendary investor
Warren Buffett has warned. The derivatives market has exploded in recent years, with
(2)…………………… banks selling billions of dollar’s worth of these investments to
(3)……………………….. as a way to off-load or manage market (4)……..…………..

But Mr Buffett argues that such highly complex financial (5)……………..…….. are time
bombs and "financial weapons of mass destruction" that could harm not only their
(6)…………………..and sellers, but the whole (7)……………….system.

Contracts devised by 'madmen'

Derivatives are financial instruments that allow investors to (8)……………………….. on

the future price of, for example, (9)………….. or shares - without buying the
(10)…………investment.

Derivates like futures, options and swaps were developed to allow (11)…………………
to (12)…………………risks in financial markets - in effect buy (13)……………………
against market movements but have quickly become a means of investment in their own
right. Outstanding derivatives (14)………………….……… - excluding those traded on
exchanges such as the International Petroleum Exchange - are worth close to $85 trillion,
according to the International Swaps and Derivatives Association. Some derivatives
contracts, Mr Buffett says, appear to have been devised by "madmen". In his letter Mr
Buffett compares the derivatives (15)……………..to "hell... easy to enter and almost
impossible to exit"

B. Choose the correct answer!

1. If you………………..you make transactions that are designed to reduce risk

regarding a particular price, interest rate or exchange rate.
a. put option
b. commodities
c. futures
d. call option
e. hedge

2. A ..... ……………………………is the money the writer of an option receives.

a. hedge
b. interest rate swap
c. exercise
d. speculator
e. premium

3. If you………………… an option you use or implement the option, taking up the

possibility to buy or sell something.
 a. hedge
b. interest rate swap
c. exercise
d. speculator
e. premium

4. A…………………………is a contract giving the buyer the right, but not the
obligation, to buy an asset in the future.
a. put option
b. commodities
c. futures
d. call option
e. hedge

5. An…………………….is an exchange of future payments on borrowed money

according to specified terms.
a. hedge
b. interest rate swap
c. exercise
d. speculator
e. premium

6. ……………………. are forward contracts for the purchase and sale of

securities, precious metals, etc, at a fixed price.
a. futures
b. interest rate swap
c. exercise
d. speculator
e. premium

7. ……………………. are raw materials such as agricultural products and metals

that are traded on special exchanges.
a. put option
b. commodities
c. futures
d. call option
e. hedge

8. A…………anticipates future changes in a market and makes risky transactions,

hoping to make a gain.
a. futures
b. interest rate swap
c. exercise
d. speculator
e. premium

9. A…………is a contract giving the possibility to sell a specified quantity of

securities, foreign exchange or commodities in the future, if it is advantageous
to do so.
a. put option
b. commodities
c. futures
d. call option
e. hedge
10. Future contracts are agreements to make or take delivery of specified……………
a. put option
b. commodities
c. futures
d. call option
e. hedge

11. Companies with fixed and floating loans can choose to………………………
a. swap, interest payments
b. eliminate, risks
c. reduce risks or uncertainty
d. options, exercise
e. determine or guarantee prices

12. Futures contracts allow you to……………………………….short-term…………

a. swap, interest payments
b. eliminate, risks
c. reduce risks or uncertainty
d. options, exercise
e. determine or guarantee prices

13. Hedging is the attempt to………………;speculating is the opposite.

a. swap, interest payments
b. eliminate, risks
c. reduce risks or uncertainty
d. options, exercise
e. determine or guarantee prices

14. If prices move the wrong way, the buyers of …………….do not…………them.
a. swap, interest payments
b. eliminate, risks
c. reduce risks or uncertainty
d. options, exercise
e. determine or guarantee prices

15. With futures, you can …………………… several months in advance.

a. swap, interest payments
b. eliminate, risks
c. reduce risks or uncertainty
d. options, exercise
e. determine or guarantee prices