Skip to main content

What is Derivative market.

Indian Derivatives Market / What is Derivative Trading - Futures & Options Trading

What is derivative market / About Trading Derivatives Markets


Globally  Over the last four decades, derivatives market has seen a phenomenal growth. Many  derivative contracts were launched at exchanges across the world. Some of the factors  driving the growth of financial derivatives are:Increased fluctuations in underlying asset prices in financial markets. Integration of financial markets globally. Use of latest  technology in  communications  has  helped  in  reduction  of  transaction costs.  Enhanced  understanding  of  market  participants  on  sophisticated  risk  management tools to manage risk.  Frequent innovations in derivatives market and newer applications of products.


Products in Derivatives Market  

Forwards 
 It is a contractual agreement between two parties to buy/sell an underlying asset at a  certain future date for a particular price that is pre‐decided on the date of contract.  Both the contracting parties are committed and are obliged to honour the transaction  irrespective of 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. These are Over‐the‐counter (OTC) contracts. 
Futures 
 A futures contract is similar to a forward, except that the deal is made through an  organized and regulated exchange rather than being negotiated directly between two  parties. Indeed, we may say 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, writer/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  according to a prearranged formula. Swaps are, broadly speaking, series of forward  contracts. Swaps help market participants manage risk associated with volatile interest  rates, currency exchange rates and commodity prices.  
*******
The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.


That’s it for this post. Do check out my other posts to gain more knowledge about finance.
The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.



Labels:

Comments

Post a Comment

Most popular post

What is Financial market.

  Financial market : A market is define as a place where any type of trade take place with the major depedent of two participants- buyer and sellers. This market vary in form,scale,location,type of participant and as well as the type of good and services taded hence there is non exhaustive list of market. Classification of financial market. 1) Money market 2) Capital market. 1 Money market    The money market is the market for financial assets which are the close substitude for money. It is a market for short term debt instrument that have a maturity period of less than or up to one year. It include treasury bills, commercial paper, banker acceptance, certificate of deposit. 2 capital market     Capital market is a market for long term securities such as equity and debt. This market aims at raising capital on long term basis for a period over one year. it act as a platformwhere the public and private sectors often sell there stakes to raise fund.
3 comments
Read more

what is Index Derivative.

Introduction to Index What is index Derivatives.   Index is a statistical indicator that measures changes in the economy in general or in  particular areas. In case of financial markets, an index is a portfolio of securities that  represent  a  particular  market  or  a  portion  of  a  market.  Each  Index  has  its  own  calculation methodology and usually is expressed in terms of a change from a base  value. The base value might be as recent as the previous day or many years in the past.  Thus, the percentage change is more important than the actual numeric value.  Financial  indices are created to measure price movement of stocks, bonds, T‐bills and other type  of financial securities. More specifically, a stock index is created to provide market  participants  with  the  information  regarding  average  share  price  movement  in  the  market. Broad indices are expected to capture the overall behaviour of equity market  and need to represent the return obtained by typica
Post a Comment
Read more