Derivatives dealers primarily conduct derivatives transactions for which of the following reasons?
A)to enhance the returns on their other investment transactions
B)to profit off of their ability to execute trades at the right time
C)to profit off of their market making services
D)to provide services to enhance the overall attractiveness of their product line
E) none of the above

Question

Derivatives dealers primarily conduct derivatives transactions for which of the following reasons?
A)to enhance the returns on their other investment transactions
B)to profit off of their ability to execute trades at the right time
C)to profit off of their market making services
D)to provide services to enhance the overall attractiveness of their product line
E)	none of the above

Quizplus · Accepted Answer

Derivatives dealers primarily conduct derivatives transactions for a variety of reasons, and the options provided touch upon several of these. However, the primary reasons can be summarized as follows:
A) To enhance the returns on their other investment transactions: Derivatives can be used to hedge or amplify the returns on other investments. For example, a dealer might use options or futures to hedge against potential losses in their stock portfolio.
B) To profit off of their ability to execute trades at the right time: Dealers might engage in speculative trading, using their expertise to time the market and execute trades that they believe will be profitable.
C) To profit off of their market making services: As market makers, derivatives dealers provide liquidity to the market by being ready to buy and sell derivatives at publicly quoted prices. They earn profits through the bid-ask spread.
D) To provide services to enhance the overall attractiveness of their product line: By offering derivatives, dealers can provide a more comprehensive suite of financial products to their clients, which can make their overall product line more attractive.
While all of these reasons are valid, the most accurate answer that encompasses the primary role of derivatives dealers is:
C) to profit off of their market making services
Market making is a core function of derivatives dealers, and while they may engage in activities related to the other options, their fundamental role in the financial markets is to facilitate transactions and provide liquidity through their market making activities. Therefore, the most appropriate answer from the options provided is C.

Derivatives Dealers Primarily Conduct Derivatives Transactions for Which of the Following