答案解析

问题如下：

A derivative is best described as a financial instrument that derives its performance by:

选项：

A.

passing through the returns of the underlying.

B.

replicating the performance of the underlying.

C.

transforming the performance of the underlying.

解释：

C is correct. A derivative is a financial instrument that transforms the performance of the underlying. The transformation of performance function of derivatives is what distinguishes it from mutual funds and exchange traded funds that pass through the returns of the underlying.

A is incorrect because derivatives, in contrast to mutual funds and exchange traded funds, do not simply pass through the returns of the underlying at payout. B is incorrect because a derivative transforms rather than replicates the performance of the underlying.