What is the difference between cash markets and derivatives markets?

• A. Cash markets involve immediate delivery of underlying assets.
• B. Derivatives involve immediate delivery of underlying assets.
• C. Cash markets are riskier than derivatives with no hedging.
• D. Derivatives markets have no leverage.

Answer: (C)

Cash markets involve buying or selling the actual asset for immediate delivery and payment, so you own the asset once the trade settles. Derivatives markets trade contracts whose value depends on an underlying asset, but settlement is typically in the future and often cash-settled rather than delivering the actual asset. This difference in delivery timing is the core distinction: cash markets give you ownership now, while derivatives are about future settlement based on the asset’s price.

Derivatives also bring leverage—small margins can control larger positions—which is a feature used for hedging or speculating on price moves. Because of that, the statement that cash markets are riskier with no hedging isn’t accurate: derivatives can hedge risk, but they also introduce other risks and, conversely, cash positions don’t come with built-in leverage or hedging unless you use additional instruments.