Derivatives are financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. There are three main types of derivatives: futures and forwards, which are contracts to buy or sell an asset on a future date; options, which give the owner the right but not obligation to buy or sell an asset; and swaps, which involve exchanging cash flows of one party's financial instrument for those of another party. Derivatives offer benefits like speculation, hedging risk, leverage, and flexibility, but also carry risks such as credit risk, potential for crimes, and impacting the leverage of an economy's debt.

1. Arayabhatta Institute of Management & Technology Topic:- Derivatives Submitted to: Submitted by: Mr. Pardeep Kumar Parneet Kaur(175) (H.O.D.& Lect. Of SAPM) Puneet Kumar (177) Labpreet Singh (172) 1

5. As all transactions in derivatives takes place in future specific dates it is easier to short sell then doing the same in cash markets because an individual can take of markets and take the position accordingly because one has more time in derivatives.

6. Since derivatives have standardized terms due to which it has low counterparty risk, also transactions costs are low in derivative market and hence they tend to be more liquid and one can take large positions in derivative markets quite easily.

8. Lowest possible Transaction cost/ Liquidity.

9. These can be closely matched with specific portfolio requirements.

11. Hedge a portfolio of shares, bonds, foreign currency.

12. Undertake arbitrage- i.e. benefits from mispricing.

14. type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives)

15. market in which they trade (e.g., exchange-traded or over-the-counter)

16. pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality)

17. Another arbitrary distinction is between: 1) vanilla derivatives (simple and more common) and 2) exotic derivatives (more complicated and specialized) There is no definitive rule for distinguishing one from the other, so the distinction is mostly a matter of custom.

18. Instruments Derivative instruments can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives

19. Contd. Types of OTC OTC (Over the Counter) Swaps Forward rate Agreements Exotic options

20. Contd. Types of ETD ETD (Exchange Traded derivatives) Future Contracts Options

24. speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level)

25. hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out

26. obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives)

28. They are a useful alternative to holding the underlying shares, which are often difficult to obtain;

29. Gearing can be achieved through their use (exposure to a stock can be achieved without huge amounts of capital outlay).

30. Flexibility.

32. Crimes .

33. Interest rate.