Which of the following is an example of a derivative product often utilized by banks?

The correct answer is an example of a derivative product utilized by banks because swap contracts are financial agreements between two parties to exchange cash flows in the future based on specified terms. These contracts allow banks to manage risk, particularly interest rate and currency exposure. For instance, an interest rate swap can help a bank convert fixed-rate borrowings into floating-rate ones, enabling better alignment with their asset-liability management strategy.

In contrast, preferred stock issuance refers to the issuance of a type of equity that gives shareholders certain privileges, like fixed dividends, but it is not a derivative. Government bonds, which are debt securities issued by the government, serve as investment vehicles rather than derivatives. Common stock buybacks involve a company repurchasing its own shares from the market to reduce the number of outstanding shares, enhancing shareholder value and not fitting the definition of a derivative product. Thus, swap contracts clearly stand out as a specific form of derivative used in managing risk and financial strategies by banks.