A derivative is a financial contract
that derives its value from an underlying asset. The buyer agrees to purchase
the asset on a specific date at a specific price.
Derivatives are often used for
commodities, such as oil, gasoline or gold. Another asset class is currencies,
often the U.S. dollar. There are derivatives based on stocks or bonds. Still
others use interest rates, such as the yield on the 10-year Treasury note.
The contract's seller doesn't have to
own the underlying asset. He can fulfill the contract by giving the buyer
enough money to buy the asset at the prevailing price. He can also give the
buyer another derivative contract that offsets the value of the first. This
makes derivatives much easier to trade than the asset itself.
Derivatives Trading
In 2016, 25 billion derivative contracts
were traded. Asia commanded 36 percent
of the volume, while North America traded 34 percent. Twenty percent of the
contracts were traded in Europe. These contract were worth $570 trillion in
2016. That's six times more than the economic output of the world.
More than 90 percent of the world's 500
largest companies use derivatives to lower risk. For example, a futures
contract promises delivery of raw materials at an agreed-upon price. This way
the company is protected if prices rise. Companies also write contracts to
protect themselves from changes in exchange rates and interest rates.
Derivatives make future cashflows more
predictable. They allow companies to forecast their earnings more accurately.
That predictability boosts stock prices. Businesses then need less cash on hand
to cover emergencies. They can reinvest more into their business.
Most derivatives trading is done by
hedge funds and other investors to gain more leverage.
That’s because derivatives only require
a small down payment, called “paying on margin.” Many derivatives contracts are
offset, or liquidated, by another derivative before coming to term. That means
these traders don't worry about having enough money to pay off the derivative
if the market goes against them. If they win, they cash in.
What are
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. Four most common examples of derivative
instruments are Forwards, Futures, Options and Swaps.
A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today. The main features of forward contracts are
1.
They
are bilateral contracts and hence exposed to counter-party risk.
2.
Each
contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
3.
The
contract price is generally not available in public domain.
4.
The
contract has to be settled by delivery of the asset on expiration date.
5.
In
case the party wishes to reverse the contract, it has to compulsorily go to the
same counter party, which being in a monopoly situation can command the price
it wants.
Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.To make trading possible, BSE specifies certain standardized features of the contract.
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64 comments:
Future contracts can be very helpful in the process of marketing. e.g. - a person named peter has bought 1000 shares whose price is 200 rs per share, if peter comes to know that the prices of the shares is going to decline in near future, peter can enter into futures contract and can save his price of assets for declining, similarly if peter comes to know that the prices of the shares bought by him is going to increase he can earn great profit from entering into a futures contract. This form of contract can also be misused for earning disproportionate profit bu unfair means.
MANYA ANJARIA
17BAL088
Derivatives are this really clever innovation in finance market.Derivatives have no direct value in and of themselves- their value is based on the expected future price movements of their underlying asset. Normally when we have some hard earned cash we want to put our cash to good use and derivatives are the best option available because with derivatives you can do things that you cannot do with bonds and stocks.for eg- when you buy a derivative contract for $50 you don't get a stock, you get something which derives its value from an underlying stock.
Damini chouhan
16bal072
Originally, derivatives were used to ensure balanced exchange rates for goods traded internationally. With differing values of different national currencies, international traders needed a system of accounting for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence. As such, derivatives have a variety of functions and applications as well, based on the type of derivative. Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset.
Lakshraj singh charan
17bal086
Many money managers use derivatives for a variety of purpose, such as hedging.
Derivatives can be used to gain quicker and more efficient access to market,. For example- it may be easier and quicker to purchase an NIFTIY 50 Futures contract than to invest in the underlying assets.
The benifits attributed to derivative instruments are:-
1. Price discovery
2. Risk management
3. They improve market efficiency for the underlying assets.
4. Derivatives also help in reducing Market transaction cost.
Govind saini
17bal082
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price.for e.g.-an IT company exports its services to US and hence earns its revenue in Dollars. If it knows it would receive a payment of $1 million in six months’ time, it cannot be sure as to what would be the Rupee value of this $1 million after six months. Assuming that the current rate is Rs 43/$, the value as per current rate would be Rs 43 million. Now suppose the actual forex rate after six months is Rs 37/$ and hence the company receives Rs 37 million which is less by almost 14% that the current value. In the reverse scenario of rupee depreciating vis-à-vis the dollar, a rate of Rs 45/$ would lead to a gain of Rs 2 million. Hence, the company is exposed to currency risk. To hedge this risk, the company may sell dollar forward i.e. it may enter into an agreement to sell $1 mn after 6 months at a rate of Rs 43/$.
One pre-requisite of a forward contract is that there should be another party which is willing to take a reverse position.
Om shankar kiradoo
17BAL094
Derivatives' price is based on underlying asset. Underlying asset is a 'financial instrument' like futures, stocks on which a derivatives price is based.
Derivatives are seen by some as legalized gambling enabling users to make bets on the market. However it does help in managing risk and helping investors to discover asset prices . Investor must accurately predict the direction in which the market or index will move up or down.
Abhilekh Tiwari
17bal066
A derivative is a contract that derives its value from the underlying assets. Derivative market can be divide into two parts-
1)Over the counter derivatives are those which do not go through an exchange.
2)Exchange-traded derivatives are those which are traded through special derivative exchange such as futures exchange.
There are four participants in a derivative market namely-
1)Hedger-It is a investment thet can offset potential losses
2)Speculation- it is purchase of an asset
3)Margin
4)Arbitrage
Syed Fahad Saeed
17bal113
Derivatives are special types of contracts situations. A derivative is an arrangement or product (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset. The underlying asset is the financial instrument (such as stock, futures, a commodity, a currency or an index) on which a derivative's price is based. 90 percent of the companies use derivatives to lower the risk and increase the future cash flows by making predictions. Derivatives help in keeping less working capital, in return for which people can invest their money in long-term perspectives and can reinvest into their business. Most derivatives trading are done in Hedge Funds. Hedge Fund is a fancy name for an investment partnership. The main purpose is to maximize investor returns and eliminate risks. More than 95 percent of all derivatives are traded between two companies or traders that know each other personally. These are called "Over the Counter Options". They are also traded through an intermediary, usually a large bank.
The common forms of derivatives are- Future Contracts, Forward contracts, Swaps, Options, Mortgage-backed security.
Yash Jain
17BAL121
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. There are 3 types of derivatives are-
1. Future derivatives is an agreement between two parties for the sale of an asset at an agreed upon price. One would generally use a futures contract to hedge against risk during a particular period of time.
2. Forward derivatives are similar to futures derivatives, the key difference being that unlike futures, forward contracts are not traded on exchange, but rather are only traded over-the-counter.
3. A swap is most often a contract between two parties agreeing to trade loan terms. One might use an interest rate swap in order to switch from a variable interest rate loan to a fixed interest rate loan, or vice versa.
Samyak Jain
17BAL044
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
SOMESHWAR SINGH CHANDEL
17BAL112
A derivative contract is essentially a contract. The contract specifies that some future commodity may be exchanged at a later date at a price fixed today. Notice the fact that the agreement would basically be worthless if not for the time difference between the setting of the price and the actual execution of the trade.
Since the price is set today, let’s say at $100 and the transaction takes place a month from now when the price could be any amount greater or lower than $100, the derivative contract becomes valuable. The derivative contract becomes a license to purchase commodities at below market prices and book an immediate gain.
Therefore, the value of the contract is derived from the fluctuation in the price of an underlying asset and hence the term derivatives to define these securities.
Modern day derivatives markets provide a mind-numbingly large number of options to the buyers and sellers of such contracts. One can literally buy a derivative on anything. Obviously assets like stocks, bonds and commodities form the basis of majority of these contracts. However, there are derivatives available for people who would like to predict the amount of rain or sunlight in a given time period at a given place!
Aryan Singh Chouhan
17BAL012
A Derivative is a contract that derives its value from the performance of an underlying asset. This underlying asset can be an index or interest rate. Derivatives can be used for a number of purposes, including ensuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, and Swaps. The main benefits of derivatives include price discovery, risk management, market efficiency for the underlying assets and help in reducing market transaction cost.
Ayushi Dubey
17BAL015
A Derivative is a financial contract with a value that is derived from an underlying asset.Derivatives have no direct value in and of themselves. Their value is based on expected future price movements of their underlying asset.They are often used as an instrument to hedge the risk for one party of contract and offering potential for high returns for the other party. Common derivates include futures and forward contract.both future and forward contracts allow investors to buy and sell an asset at the specific time and price, but they have many subtle differences.Futures contracts are traded on exchanges, making them more standardized and have clearinghouses that guarantee transactions and are marked to daily whereas forward contracts are customized and are settled on one date at the end of the contract.
The definition of derivates as it says its value is being derived from the value of one or more underlying asset which includes thing like commodities, precious metal, currencies, bonds, etc. the value of these commodities since are linked with various other securities in the market they are highly risky. some of the financial derivates include options, futures, forward contract, swaps, it has advantages as well disadvantages like leverage and management of the risk, the disadvantages are that these are highly volatile since their values are based on certain underlying asset and commodity which are exposed to high risk and its not everyone's cup of tea it needs prerequisite expertise. also due to their limited contract life, one may even have chances of loosing completely within the agreed time frame.
A Derivative is a financial contract with a value that is derived from an underlying asset like commodities, precious metal, currencies, bonds, etc .Derivatives have no direct value in and of themselves. Derivatives can be used for a number of purposes, including ensuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
shubham raghuwanshi
17bal050
A derivative is a contract whose value depends on the performance of an underlying asset. The leverage that derivative market provide is the potential to make huge and extreme profits. Having advanced knowledge to ensure that risks involved are mitigated is a prerequisite to emerge as a big player in the derivative market. This is an undeniable fact that derivatives market is highly volatile since value of derivatives depend on some underlying things such as commodities, metals, stocks etc these are exposed to risks. Thus an individual requires expert knowledge pertaining to her field of trade. Hence derivatives market is quite complex and that various strategies can be implemented only by an expert thus making the entire process difficult and cumbersome for a layman and limiting the usefulness of the derivatives market.
17bal025
The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon an underlying asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity.
It’s hard to make an example of “derivative market”, as it’s not a state of the market. “Bullish market” or “Bearish market” is a state, but “derivative” is more a type of the market. Feel the difference.
Derivative market is a market in which the conclusion of terminal contracts (forwards, futures, options) takes place.
Derivative market can be the stock exchange (for example - the futures market) as well as OTC (the market, where forward contracts are negotiated).
For example, if you buy a crude oil CFD, you are not actually buying into an agreement to buy crude oil (like with a futures contract) rather you are just entering into an agreement with your broker that if the price goes up, you make money, and if the price goes down you lose money. A CFD is like a "side bet" on another market.
PALAK GUPTA (17bal095)
Derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying".Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps.
FIA submitted comments to SEBI in response to the regulator's Discussion Paper on the Growth and Development of the Equity Derivatives Market in India.
FIA suggested that India’s derivatives markets could benefit from industry-wide standard processes and documentation which can lead to increased operational efficiencies and lower costs, encouraging greater market participation.
Definition: A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps.one of the most easy answer to understand derivatives . In trading there is always one underlying asset for trade . In equity market the said asset is stock. In derivatives market too there is an asset to trade but it’s value is based on other asset . Meaning of derivatives is derived from . Thus value of derivatives is derived from other asset .In equity derivatives the value is derived from stock, commodity, index etc . The value may be just premium or premium plus price of stock or index . Many times the premium may be negative too.
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date. A forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward contracts are not as easily available to the retail investor as futures contracts.
Rakshita Shukla
17bal100
derivatives were used to ensure balanced exchange rates for goods traded internationally. With differing values of different national currencies, international traders needed a system of accounting for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence. As such, derivatives have a variety of functions and applications as well, based on the type of derivative. Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset. Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues.
A derivative is a contract whose value depends on the performance of an underlying asset. The leverage that derivative market provide is the potential to make huge and extreme profits. Having advanced knowledge to ensure that risks involved are mitigated is a prerequisite to emerge as a big player in the derivative market. This is an undeniable fact that derivatives market is highly volatile since value of derivatives depend on some underlying things such as commodities, metals, stocks etc these are exposed to risks. Thus an individual requires expert knowledge pertaining to her field of trade. Hence derivatives market is quite complex and that various strategies can be implemented only by an expert thus making the entire process difficult and cumbersome for a layman and limiting the usefulness of the derivatives market.
Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence. As such, derivatives have a variety of functions and applications as well, based on the type of derivative. Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset. Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues.
A derivative contract is essentially a contract. The contract specifies that some future commodity may be exchanged at a later date at a price fixed today. Notice the fact that the agreement would basically be worthless if not for the time difference between the setting of the price and the actual execution of the trade.This is an undeniable fact that derivatives market is highly volatile since value of derivatives depend on some underlying things such as commodities, metals, stocks etc these are exposed to risks. Thus an individual requires expert knowledge pertaining to her field of trade. Hence derivatives market is quite complex and that various strategies can be implemented only by an expert thus making the entire process difficult and cumbersome for a layman and limiting the usefulness of the derivatives market.Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence.
Arjun Singh Tomar
17bal077
A Derivative is a contract that derives its value from the performance of an underlying asset. A derivative contract is essentially a contract. The contract specifies that some future commodity may be exchanged at a later date at a price fixed today.The underlying asset can be an index or interest rate. Derivatives can be used for a number of purposes, including ensuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets.
Most common derivatives are - futures, forwards, options and swap.
Derivatives are used for commodities, such as oil, gasoline or gold or for currencies, often the U.S. dollar. Derivatives is an emerging method in the economy and is a step ahead in making a cashless economy.
Tarushi Agrawal
17bal114
Financial derivatives are used for two main purposes to speculate and to hedge investments. Let’s look at a hedging example. Since the weather is difficult–if not impossible–to predict, orange growers in Florida rely on derivatives to hedge their exposure to bad weather that could destroy an entire season’s crop. Think of it as an insurance policy—farmers purchase derivatives that allow them to benefit if the weather damages or destroys their crop. If the weather is good, and the result is a bumper crop, then the farmer is only out the cost of purchasing the derivative.
Part of the reason why many find it hard to understand derivatives is that the term itself refers to a wide variety of financial instruments. At its most basic, a financial derivative is a contract between two parties that specifies conditions under which payments are made between two parties. Derivatives are “derived” from underlying assets such as stocks, contracts, swaps, or even, as we now know, measurable events such as weather.
Simran Pahwa
17BAL111
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. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.
The world over, derivatives are a key part of the financial system. The most important contract-types are futures and options, and the most important underlying markets are equity, treasury bills, commodities, foreign exchange and real estate.Forward markets worldwide are afflicted by several problems: (a) lack of centralization of trading, (b) illiquidity, and (c) counterparty risk.: Futures markets were designed to solve all the
three problems (a, b and c listed in Question 1.4)
of forward markets. Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardised and trading is centralised, so that futures markets are highly liquid. There is no counterparty risk. In futures markets,
unlike in forward markets, increasing the time to expiration does not increase the counterparty risk.
Vanshika Agarwal
17bal117
The concept of derivatives is extremely helpful to facilitate the market as without actually possessing the asset physically, one can trade it. A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
Shrishti Mishra
17BAL110
at some point it may become difficult to distinguish between futures and forward contracts, but then there is a very big difference which is not visible in prima facia case. moreover with the rise of derivatives we are seeing people investing more in MCX that is multi commodity exchange specially in the products like gold silver oil i.e. internationally recognized things. and what we also need to see is when it started it was to save both buyers and sellers from any kind of future insecurity but now its a market in itself.
Nikunj Maheshwari
17bal093
Derivative Instruments are innovative financial instruments that provide a diversification channel for investors to protect themselves from the vagaries of the financial markets.
Though derivative have advantages like stabilizing purchase expense, maximize profits, informed purchase decisions etc, it have many disadvantages also which include following:
~ The process is complex and have many intricacies so only an expert would be able to maximize benefit the help of this instrument.
~ If a businessman fails to predict the price movement accurately then the prices of the raw material will increase which will lead to increased purchase cost.
17BAL070
criticism of derivatives:
Risk-When a derivative fails to help investors achieve their objectives, the derivative itself is blamed for the ensuing losses when, in fact, it's often the investor who did not fully understand how it should be used, its inherent risk, etc.
Gambling- Some view derivatives as a form of legalized gambling enabling users to make bets on the market. However, derivatives offer benefits that extend beyond those of gambling by making markets more efficient, helping to manage risk and helping investors to discover asset prices.
Lifespan - Derivatives are "time-wasting" assets. As each day passes and the expiration date approaches, you lose more and more "time" premium and the option's value decreases.
Direction and Market Timing - In order to make money with many derivatives, investors must accurately predict the direction in which the market or index will move (up or down) and the minimum magnitude of the move during a set period of time. A mistake here almost guarantees a substantial investment loss.
17bal101
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Today, derivatives are based upon a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.Futures contracts are one of the most common types of derivatives. A futures contract (or simply futures, colloquially) is an agreement between two parties for the sale of an asset at an agreed upon price.Forward contracts are another important kind of derivative similar to futures contracts, the key difference being that unlike futures, forward contracts (or “forwards”) are not traded on exchange, but rather are only traded over-the-counter.
LIMITATIONS :
Derivative is a broad category of security, so using derivatives in making financial decisions varies by the type of derivative in question. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a portfolio strategy.
VARTIKA JAIN
17BAL125
More than 90 percent of the world's 500 largest companies use derivatives to lower risk. For example, a futures contract promises delivery of raw materials at an agreed-upon price. This way the company is protected if prices rise. Companies also write contracts to protect themselves from changes in exchange rates and interest rates.
Derivative is a broad category of security, so using derivatives in making financial decisions varies by the type of derivative in question. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a portfolio strategy.
Adhirath Choudhary
17BAL068
Derivatives are a form of asset who derive their value from other underlying assets. These assets maybe gold, currency or any other commodities. The ownership of these commodities is not necessary. They may trade at the price of those assets. Various companies fix prices before the day of contract to avoid the fluctuations in future. This helps the business to plan the forecast its cash flow and invest money accordingly.
17bal060
Yasha Goyal
Derivatives were used to ensure balanced exchange rates for goods traded internationally. With differing values of different national currencies, international traders needed a system of accounting for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence. As such, derivatives have a variety of functions and applications as well, based on the type of derivative. Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset.
17bal085
KARAN CHOUDHARY
Futures are standardized contracts and they are traded on the exchange. On the other hand, Forward contract is an agreement between two parties and it is traded over-the-counter (OTC).
Futures contract does not carry any credit risk because the clearing house acts as counter-party to both parties in the contract. To further reduce the credit exposure, all positions are marked-to-market daily, with margins required to be maintained by all participants all the time. On the other hand, forward contracts do not have such mechanisms in place. This is because forward contracts are settled only at the time of delivery. The credit exposure keeps on increasing since profit or loss is realized only at the time of settlement.
In derivatives market, the lot size is predefined. Therefore, one cannot buy a contract for a single share in futures. This does not hold true in forward markets as these contracts are customized based on an individual’s requirement.
Lastly, future contracts are highly standardized contracts; they are traded in the secondary markets. In the secondary market, participants in the futures can easily buy or sell their contract to another party who is willing to buy it. In the contrast, forwards are unregulated, so there is essentially no secondary market for them.
MOHIT PALIWAL
17BAL090
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.Futures contracts, forward contracts, options, swaps, and warrants are common derivatives.
Derivatives are a good option to avoid insecurities.Generally people use this to avoid risk at any point of time.
PRATIKSHA SENGAR
17BAL040
Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. This is why they are called ‘Derivatives’.
The value of the underlying assets changes every now and then.
For example, a stock’s value may rise or fall, the exchange rate of a pair of currencies may change, indices may fluctuate, commodity prices may increase or decrease. These changes can help an investor make profits. They can also cause losses. This is where derivatives come handy. It could help you make additional profits by correctly guessing the future price, or it could act as a safety net from losses in the spot market, where the underlying assets are traded.
There are four types of derivative contracts – forwards, futures, options and swaps:
Futures and forwards: Futures are contracts that represent an agreement to buy or sell a set of assets at a specified time in the future for a specified amount. Forwards are futures, which are not standardized. They are not traded on a stock exchange.
Options: These contracts are quite similar to futures and forwards. However, there is one key difference. Once you buy an options contract, you are not obligated to hold the terms of the agreement.
Derivatives are financial contracts that derive their value from the performance of an underlying asset.since it has a derived value thus called derivatives.it does help in managing risk and helping investors to discover asset prices . Investor must accurately predict the direction in which the market or index will move up or down.
Now what are underlying assets?
The underlying asset is the financial instrument (such as stock, futures, a commodity, a currency or an index) on which a derivative's price is based.Common instruments include bonds, commodities, currencies, interest rates, stocks etc.The ownership of these commodities is not necessary. They may trade at the price of those assets.
NOW Types of derivative contracts – forwards
futures
options
swaps.
Difference between future and forward:
A futures contract is an agreement between two parties for the sale of an asset at an agreed upon price.Forward contracts are another important kind of derivative similar to futures contracts, the key difference being that unlike futures, forward contracts are not traded on exchange, but rather are only traded over-the-counter.
17bal084
Harshita khare
Contract based on (derived from) but independent of another contract, and involving a party not associated with the original (underlying) contract. For example, a juice packager's contract to purchase orange juice (orange derivative) from a juice manufacturer is a derivative contract and has nothing to do with the manufacturer's contract for purchase of oranges from an orange grower, although the price of juice is tied to the price of oranges. Similarly, a contract based on the price of certain shares has nothing to do with the purchase of the shares although their prices are tied
shantanu sudheer shastri
17bal108
Derivative Instruments are innovative financial instruments that provide a diversification channel for investors to protect themselves from the vagaries of the financial markets.
Though derivative have advantages like stabilizing purchase expense, maximize profits, informed purchase decisions etc, it have many disadvantages also which include following:
~ The process is complex and have many intricacies so only an expert would be able to maximize benefit the help of this instrument.
~ If a businessman fails to predict the price movement accurately then the prices of the raw material will increase which will lead to increased purchase cost.
Samar Pratap (17bal105)
A derivative is a contract whose value depends on the performance of an underlying asset. Its an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, bonds, precious metals , stock indices etc.
Four examples of derivative instruments are:
-Forwards
-Futures
-Options
-Swap
Future and forward contracts allow investors to buy and sell an asset at a specific time and price, but they have many differences. Futures contracts are traded on exchanges, making them more standardized and have clearinghouses that guarantee transactions and are marked to daily whereas forward contracts are customized , which makes them non tradeable in the future and are settled on one date at the end of the contract.
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Watch the above video for Derivatives
https://www.youtube.com/watch?v=gxIe2vFK4dE
Watch the above video for Derivatives
https://www.youtube.com/watch?v=i_pLF9J3QPE
Forward and Futures Contracts
Derivatives market depends on the value derived from the underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.Derivatives market is based on contracts between two or more parties.The market can be divided into two, that for exchange-traded derivatives {Future contracts} and that for over-the-counter (OTC)derivatives{Forward Contracts}.
Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset. Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.
However, Derivatives market can be misused for disproportionate profits in case of Forward or Future Contracts by hedging the prices of assets.
Priyanka Bajpai
17bal098
Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. This is why they are called ‘Derivatives’.
Hedgers and speculators are the participants of the derivative market. Hedging is when you have prior information and you try to maximize your benefit through it. Speculation is when you use your experience to anticipate the situation of the market.
There are few problems of forward contract. Firstly, it involves too many specifications which makes the contract non-tradeable and it also narrow down the audience. Secondly, illiquidity of cash is the problem of forward contract. No matter whatever is the image or credibility of the other party there is always a risk which is called counter party risk which is the third problem of forward market.
Yagya Sharma
17BAL059
How to earn money from derivatives?
One strategy for earning income with derivatives is selling options to collect premium amounts. Often, options expire worthless, allowing the option seller to keep the entire premium amount. Although there is a decent opportunity for profit, selling options can entail a substantial amount of risk. Derivatives are financial contracts whose value is derived from underlying assets. Options, along with futures contracts and forward contracts, are some of the most common types of derivatives.
An option on a stock or exchange-traded fund (ETF) is a financial contract granting the buyer the right to purchase 100 shares of the underlying security at a certain strike price until the option’s expiration date. The option buyer is not required to exercise the option. The seller of the option is collecting a premium as compensation for the obligation to deliver the shares to the option holder if the option is exercised. By selling options, an investor can collect premium amounts as an income stream.There are many different option selling strategies. One option strategy is selling covered calls. An investor who owns shares of a stock can sell call options with a strike price above the current trading price to collect the premium. If the option expires in the money, there is a likelihood the investor will need to deliver the shares to the option holder. If the price of the stock stays below the strike price until the option’s expiration date, the investor gets to keep the entire amount of the premium. This is a strategy with limited risk since the investor owns the shares of the underlying stock.
Selling naked options is another strategy that has unlimited risk. An investor sells options with no position in the underlying security and no other option to hedge the risk. If the option expires worthless, the investor gets to keep the entire premium amount. However, if the price goes against the sold option, losses can be substantial.
17bal051
Shubhsmita
The knowledge of derivatives being constrained to degree courses is something that the education system does wrong, Warren Buffet knew about investing the buying shares at the age of 7 and he became a multi billionaire in less than 2 decades, that's too much success out of the risk market with merely knowledge of how the stocks and securities market runs, the scope of the same is very narrow in India and in my opinion the government needs to bring in a lot of decent reforms for making the market appealing to investors and companies rather than being the same old bazaar India has always been!
A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a particular time. Every futures contract has the following features:
Buyer
Seller
Price
Expiry
Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.
The difference between the price of the underlying asset in the spot market and the futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is usually negative, which means that the price of the asset in the futures market is more than the price in the spot market. This is because of the interest cost, storage cost, insurance premium etc., That is, if you buy the asset in the spot market, you will be incurring all these expenses, which are not needed if you buy a futures contract. This condition of basis being negative is called as 'Contango'.
Sometimes it is more profitable to hold the asset in physical form than in the form of futures. For eg: if you hold equity shares in your account you will receive dividends, whereas if you hold equity futures you will not be eligible for any dividend.
When these benefits overshadow the expenses associated with the holding of the asset, the basis becomes positive (i.e., the price of the asset in the spot market is more than in the futures market). This condition is called 'Backwardation'. Backwardation generally happens if the price of the asset is expected to fall.
It is common that, as the futures contract approaches maturity, the futures price and the spot price tend to close in the gap between them ie., the basis slowly becomes zero.
A forward contract is one of the simplest forms of derivatives where the contract value depends on the spot or market price of the underlying asset
A forward contract is an agreement between the buyer and a seller an asset or a commodity at a future date with the price of the asset, fixed at the time the contract is made. As the name suggests, the contract merely binds two parties to exchange the asset at a determined time in the future at a price that was agreed upon initially. The price at which the contract is fixed is referred to as the delivery price or the forward price.
Forward contracts are not standardized, meaning the terms of the quantity, quality of the asset and other factors are negotiated on a contract basis.
The party agreeing to buy the underlying asset in the forward contract is said to have taken a long position while the party agreeing to sell the underlying asset in the forward contract is said to have taken a short position.
Forward contracts are derivatives and can be used for hedging purposes primarily by producers.
Originally, derivatives were used to ensure balanced exchange rates for goods traded internationally. With differing values of different national currencies, international traders needed a system of accounting for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Because a derivative is a category of security rather than a specific kind, there are several different kinds of derivatives in existence. As such, derivatives have a variety of functions and applications as well, based on the type of derivative. Certain kinds of derivatives can be used for hedging, or insuring against risk on an asset. Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros. Additionally, many derivatives are characterized by high leverage.
Derivatives Trading: How Are They Used?
Hedging
Volatility and unexpected movement is par for the course in virtually all markets – leaving companies at the mercy of the elements (quite literally in the case of Agri-business). Take the Ryan Airs and Easy Jets of this world, for instance. To keep ticket prices low and to still turn a profit, near certainty about the cost of overheads is desirable – with fuel being the big one.
So, if you think that oil prices have hit rock bottom at $45 a barrel, now might be the time to enter into an arrangement to purchase your oil for the next quarter at $50 a barrel. Yes, things in China could take a further downturn, triggering further falls in the price of Brent crude (in which case you’ve technically lost on the bet). Equally, an escalation in the Middle East could trigger an upward spike, from which you’re shielded for the time being.
Crucially though, what you have is certainty on price for a defined period. Excellent news for businesses trying to map their future costs.
Speculation
For every party looking to hedge, there has to be someone willing to take on the risk. ‘Speculative trading’ might conjure up memories of Barings Bank, but in reality speculators have an important commercial role to play in all of this.
There are opportunities for retail investors and part-time traders too
According to me this market is more suitable for experts because of the mere fact that derivatives derieve their value from an underlying asset whose value is to change for sure. Now to determine whether it appreciates or depreciates is something that will take a lot of skill and a bit of secondary information. For a common man looking for an oppourtunity to expand his wealth this option might be a bit too risky.
Paridhi Galundia
17bal035
derivatives" essentially refer to any transaction or agreement that isn't a "spot trade". The transaction happens keeping in mind the strike price.
It is a market which is totally based on the hedging process which requires great experience. Due to this it has some shortfalls also like it is a risky one as some assets are there which are very hard to predict upon and offers greater risk instead of mitigating the same. For example . Banks in the mid-2000s were issuing bonds which were backed by mortgages that the bond money was used to fund, known as "mortgage-backed securities", and then creating "collateralized debt objects" by taking a set of bonds, identifying mortgages within each one that were of a particular risk category (prime, subprime etc) and bundling those together as a "collateralized debt object" which they sold to investors. The problem is that in this multi-step process, information about exactly which mortgages were in each CDO was lost, or at least made very difficult, and thus the investment grade of these securities was difficult to estimate.
Also some of the assets are manipulated by the companies and it looks like that you ate predicting them right but instead you are wrong you are deploying your money in the wrong direction which results in bad consequences.
17BAL058
A derivative is a security with a price that is dependent upon underlying assets. The derivative itself is a contract between two or more parties based upon the asset. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives. Futures contracts are one of the most common types of derivatives. A futures contract (or simply futures, colloquially) is an agreement between two parties for the sale of an asset at an agreed upon price. One would generally use a futures contract to hedge against risk during a particular period of time. Forward contracts are another kind of derivative, the key difference is unlike futures, forward contracts are not traded on exchange, but rather are only traded over-the-counter. Options are another common form of derivative. An option is similar to a futures contract in that it is an agreement between two parties granting one the opportunity to buy or sell a security from or to the other party at a predetermined future date. Yet, the key difference between options and futures is that with an option the buyer or seller is not obligated to make the transaction if he or she decides not to, hence the name “option.” The exchange itself is, ultimately, optional.
Gourav Asati
17bal023
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
COMMON FORM OF DERIVATIVES :-
FUTURE CONTRACTS are one of the most common types of derivatives. A futures contract (or simply futures, colloquially) is an agreement between two parties for the sale of an asset at an agreed upon price. One would generally use a futures contract to hedge against risk during a particular period of time.
FORWARD CONTRACTS are another important kind of derivative similar to futures contracts, the key difference being that unlike futures, forward contracts (or “forwards”) are not traded on exchange, but rather are only traded over-the-counter.
SWAPS are another common type of derivative. A swap is most often a contract between two parties agreeing to trade loan terms. One might use an interest rate swap in order to switch from a variable interest rate loan to a fixed interest rate loan, or vice versa.
OPTIONS are another common form of derivative. An option is similar to a futures contract in that it is an agreement between two parties granting one the opportunity to buy or sell a security from or to the other party at a predetermined future date. Yet, the key difference between options and futures is that with an option the buyer or seller is not obligated to make the transaction if he or she decides not to, hence the name “option.”
LIMITATION OF DERIVATIVES :-
derivative is a broad category of security, so using derivatives in making financial decisions varies by the type of derivative in question. Generally speaking, the key to making a sound investment is to fully understand the risks associated with the derivative, such as the counterparty, underlying asset, price and expiration. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a portfolio strategy.
TUSHAR CHOUDHARY
17BAL115
The forwards contract is the simplest form of derivative. Consider the forwards contract as the older avatar of the futures contract. Both the futures and the forward contracts share a common transactional structure, except that over the years the futures contracts have become the default choice of a trader. The forward contracts are still in use, but are limited to a few participants such as the industries and banks.The Futures market is an integral part of the Financial Derivatives world. ‘Derivatives’ as they are called is a security, whose value is derived from another financial entity referred to as an ‘Underlying Asset’. The underlying asset can be anything a stock, bond, commodity or currency. The financial derivatives have been around for a long time now. The earliest reference to the application of derivatives in India dates back to 320 BC in ‘Kautilya’s Arthashastra’. It is believed that in the ancient Arthashastra (study of Economics) script, Kautilya described the pricing mechanism of the standing crops ready to be harvested at some point in the future. Apparently he used this method to pay the farmers much in advance, thereby structuring a true ‘forwards contract’.
17BAL003 Abhirakshak Rajpal
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