1. Financial derivatives
Financial derivatives are financial contracts that derive their value
from an underlying asset, such as a stock, bond, commodity, or
currency. They are used by individuals and institutions to manage
risk, speculate on price movements, or to gain exposure to
different asset classes.
2. • Examples of financial derivatives include options, futures,
forwards, and swaps. Options give the holder the right, but not
the obligation, to buy or sell an underlying asset at a specific
price and time in the future. Futures and forwards are
agreements to buy or sell an asset at a specific price and time
in the future. Swaps are agreements to exchange cash flows
based on different financial instruments.
3. • Derivatives can be used for hedging or speculation. For
example, a company may use futures contracts to lock in a
price for a commodity they need in the future, while a trader
may buy an option to profit from a predicted change in the price
of an asset. However, derivatives can also be complex and
carry significant risk, so they should be used with caution and
only by those with a good understanding of the underlying
instruments.
4. Financial derivatives types
• Financial derivatives are contracts between two parties that
derive their value from an underlying asset or group of assets.
Here are some common types of financial derivatives:
1.Futures: Futures are contracts that obligate the buyer to
purchase an underlying asset at a specific price and date in the
future, and the seller to deliver the asset.
2.Options: Options are contracts that give the buyer the right, but
not the obligation, to buy or sell an underlying asset at a specific
price and date in the future.
5. 1.Swaps: Swaps are contracts between two parties to exchange
cash flows based on a notional principal amount. The cash
flows can be based on different interest rates, currencies, or
other underlying assets.
2.Forwards: Forwards are similar to futures contracts, but they
are traded over-the-counter (OTC) rather than on an exchange.
The terms of the contract are customized to meet the needs of
the two parties.
3.Credit derivatives: Credit derivatives are contracts that transfer
credit risk from one party to another. These can include credit
default swaps (CDS), which allow investors to protect
themselves against the default of a particular company or bond.
