DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET.A cash market is a marketplace for the immediate settlement of transactions involving commodities and securities.
1. DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET
A cash market is a marketplace for the immediate settlement of transactions involving commodities
and securities. In a cash market, the exchange of goods and money between the seller and the buyer
takes place in the present, as opposed to the futures market where such an exchange takes place on a
specified future date. This type of market is also known as the spot market.
The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets. The market can be divided into
two, that for exchange-traded derivatives and that for over-the-counter derivatives.
Cash and derivatives markets are the terms which are used in the context of stock market; they both
refer to trading of stocks. Some of the difference between cash market and derivative market is as
follows:
1. In cash market, one can buy even one share of a company while in derivatives market minimum
lots such as 20, 50 or 100 are fixed.
2. In Cash market people buy stocks for investment purpose only while in derivatives market people
trade for hedging of their positions in cash market, arbitrage or for speculation.
3. While Buying securities in cash market involves paying all the money so for example if you want
to buy 100 stock of Microsoft trading at $100 then you have to pay $10000 for purchasing 100
stock of Microsoft while if one wants to trade in derivatives market than he or she can buy 100
stocks of Microsoft by paying 20 percent margin money upfront.
4. When one buys stock in cash market he or she becomes a part owner of the company and
therefore he or she has all the rights such as right to vote or right for dividend, while in derivatives
market one does not have any such rights.
5. In cash market one cannot buy or sell the index but only stocks of individual companies while
under derivatives market one can buy and sell both index as well individual stocks of company.
2. Types of Derivative Instruments
Derivative Instruments
A derivative is an instrument whose value is derived from the value of one or more underlying, which
can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc.
Forward Contracts
Forward contract is an agreement between two parties and it is traded over-the-counter (OTC).
The assets often traded in forward contracts include commodities like grain, precious metals,
electricity, oil, beef, orange juice, and natural gas, but foreign currencies and financial
instruments are also part of today's forward markets. Forward contracts may be "cash settled,"
meaning that they settle with a single payment for the value of the forward contract.
Future Contracts
A futures contract is a legal agreement to buy or sell a particular commodity or asset at a
predetermined price at a specified time in the future. Futures contracts are standardized for
quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract
is taking on the obligation to buy the underlying asset when the futures contract expires. The
seller of the futures contract is taking on the obligation to provide the underlying asset at the
expiration date.
Options
Options provide the buyer of the contracts the right but not the obligation to purchase or sell
the underlying asset at a predetermined price. Based on the option type, the buyer can exercise
the option on the maturity date (European options) or on any date before the maturity
(American options).
Swaps
Swaps are derivative contracts that allow the exchange of cash flows between two parties. The
swaps usually involve the exchange of a fixed cash flow for a floating cash flow. The most
popular types of swaps are interest rate swaps, commodity swaps, and currency swaps.