A derivative is a financial contract between two parties whose value is based on an agreed-upon underlying asset such as a bond, commodity, currency, interest rate, or stock. Ownership of a derivative does not equate to ownership of the underlying asset. Derivatives can be used for hedging risk by offsetting potential losses or for speculation by making financial bets on the future value of the underlying asset. Common uses of derivatives include managing currency, interest rate, price, and credit risk.
Arbitrageurs are experienced traders who buy & sell securities simultaneously from different markets to make profit from difference in price. These securities could be shares, bonds, commodities, currencies or instrument that can be easily bought & sold.
https://efinancemanagement.com/derivatives/arbitrageur
Arbitrageurs are experienced traders who buy & sell securities simultaneously from different markets to make profit from difference in price. These securities could be shares, bonds, commodities, currencies or instrument that can be easily bought & sold.
https://efinancemanagement.com/derivatives/arbitrageur
Derivative is a financial security in the form of contract whose value is derived from an underlying asset
The buyer agrees to purchase the asset in future on a specific date at a specific price
Thus, it is a contract between two or more parties, and its price is determined by fluctuations in the underlying asset
Derivatives are based on wide range of underlying assets like –
Financial assets such as shares, bonds, debentures
Metals such as gold, silver, aluminium, copper, lead, zinc, tin etc.
Energy resources such as coal, oil, natural gas, electricity etc.
Agri commodities such as wheat, cotton, pulses, sugar etc.
Ways to trade in derivatives -
1.Over the counter trade
2.Exchange traded derivatives
Products in derivatives market -
Forwards - It is a contractual agreement between two parties to buy/sell an underlying asset on a specified future date for a particular price that is pre-decided on the date of contract
Both the contracting parties thus forms an agreement and are obliged to honour the transaction irrespective of the market price of the underlying asset at the time of delivery
Since forwards are negotiated between two parties the terms and conditions of contracts are customized in accordance with both of them
Futures - A future contract is similar to a forward contract except that the contract is made through a regulated exchange rather than being negotiated directly between two parties .Futures are exchange traded forward contracts
Options - An option is a contract that gives the right, but not an obligation , to buy or sell the underlying on or before a stated date and at a stated price
While buyer of option pays the premium and buys the right , seller of option receives the premium with obligation to sell/buy the underlying asset, if the buyer exercises his right
Swaps - A swap is an agreement made between two parties to exchange cash flows in the future
Swaps help market participants manage risk associated with volatility mainly in interest rates and currency exchange rates
For example- Interest rate swaps performed to switch from a floating interest to fixed interest and vice-versa
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A Presentation on Financial Derivatives. this covers it's definition, features, types, benefits, challenges and applications.
Derivative is defined as the future contract between two parties. It means there must be a contract-binding on the underlying parties and the same to be fulfilled in future.
Normally, the derivative instruments have the value which is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets.
Derivative is a financial security in the form of contract whose value is derived from an underlying asset
The buyer agrees to purchase the asset in future on a specific date at a specific price
Thus, it is a contract between two or more parties, and its price is determined by fluctuations in the underlying asset
Derivatives are based on wide range of underlying assets like –
Financial assets such as shares, bonds, debentures
Metals such as gold, silver, aluminium, copper, lead, zinc, tin etc.
Energy resources such as coal, oil, natural gas, electricity etc.
Agri commodities such as wheat, cotton, pulses, sugar etc.
Ways to trade in derivatives -
1.Over the counter trade
2.Exchange traded derivatives
Products in derivatives market -
Forwards - It is a contractual agreement between two parties to buy/sell an underlying asset on a specified future date for a particular price that is pre-decided on the date of contract
Both the contracting parties thus forms an agreement and are obliged to honour the transaction irrespective of the market price of the underlying asset at the time of delivery
Since forwards are negotiated between two parties the terms and conditions of contracts are customized in accordance with both of them
Futures - A future contract is similar to a forward contract except that the contract is made through a regulated exchange rather than being negotiated directly between two parties .Futures are exchange traded forward contracts
Options - An option is a contract that gives the right, but not an obligation , to buy or sell the underlying on or before a stated date and at a stated price
While buyer of option pays the premium and buys the right , seller of option receives the premium with obligation to sell/buy the underlying asset, if the buyer exercises his right
Swaps - A swap is an agreement made between two parties to exchange cash flows in the future
Swaps help market participants manage risk associated with volatility mainly in interest rates and currency exchange rates
For example- Interest rate swaps performed to switch from a floating interest to fixed interest and vice-versa
Thank you for Watching
Subscribe to DevTech Finance
A Presentation on Financial Derivatives. this covers it's definition, features, types, benefits, challenges and applications.
Derivative is defined as the future contract between two parties. It means there must be a contract-binding on the underlying parties and the same to be fulfilled in future.
Normally, the derivative instruments have the value which is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets.
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1. A derivative is a contract between two or more parties whose
value / payoff is based on an agreed-upon underlying financial
instrument, index or security(underlying Asset).
Common underlying instruments include bonds, commodities,
currencies, interest rates, market indexes and stock.
A derivative's value is based on an asset, but ownership of a
derivative doesn't mean ownership of the asset.
4. Derivatives can be used either:
• For Risk management (i.e. to “hedge” by providing offsetting
compensation in case of an undesired event, or
• For speculation (i.e. making a financial "bet"). Enhance
returns
• For Arbitrage: Locking the profit by simultaneously entering
into contacts in multiple markets
5. Risk Management
Derivatives are used for different type of risk management
purpose. It includes
• Currency Risk
• Interest Rate Risk
• Price Risk i.e stocks, commodities
• Credit Risk
Example : Hedging
Market
Risk
6. Speculation & Arbitrage
Speculation
Derivatives can be used to acquire risk, rather than to hedge against risk. Thus, some
individuals and institutions will enter into a derivative contract to speculate on the
value of the underlying asset. Speculators look to buy an asset in the future at a low
price according to a derivative contract when the future market price is high, or to sell
an asset in the future at a high price according to a derivative contract when the
future market price is low.
Example
Arbitrage
Locking the profit by simultaneously entering into contacts in multiple markets i.e. buy
instrument in one market and sell in another market. Benefit from the spread in the
markets.
Example
7. Characteristics of the derivative
• The contract is bilateral
• The contract is settled at a future date.
• The value of the contract is derived (hence the term
"derivative") from the value of the underlying asset
referenced by the contract.
• The transactions in the derivatives are settled by the
offsetting/Squaring transactions in the same derivative.
8. Characteristics(conti...)
• No limit in no of units transacted in DM because there is no
physical assets to be transacted.
• Usually Screen Based.
• Only Secondary Market Securities are traded & can’t help in
raising funds to a firm.
• Quite Liquid or transactions can be easily effected.