Mondo Visione  Mar 21  Comment 
The European Securities and Markets Authority (ESMA) has issued today an opinion providing further guidance on the treatment of packages under the trading obligation for derivatives which the Markets in Financial Instruments Regulation (MiFIR)...
Financial Times  Mar 16  Comment 
Regulators air differences over central counterparties as crypto pioneers make a mark
Mondo Visione  Mar 16  Comment 
Osaka Exchange, Inc. (OSE) will partially revise the derivatives trading rules, in order to invigorate and enhance the convenience of the derivatives market. Partial Revisions to Derivatives Trading Rules Public...
Mondo Visione  Mar 15  Comment 
Quantile Technologies ("Quantile") has completed the world's first live multilateral counterparty risk reduction run in the OTC equity derivative markets. The new service reduces exposure using risk-reducing trades generated from proprietary...
The Economic Times  Mar 14  Comment 
Sebi plans to address with the new norms any inefficiencies present in the market and any regulatory arbitrage that needs to be plugged.
Mondo Visione  Mar 14  Comment 
GMEX Technologies (GMEX), a wholly owned subsidiary of GMEX Group and a provider of multi-asset exchange trading and post trade technology delivered through a partnership driven approach, is delighted to announce that the Blockchain Board of...
Mondo Visione  Mar 12  Comment 
NZX announces the addition of calendar spreads and implied order functionality on all futures contracts in the dairy derivatives market, effective 19 March 2018. The implementation of these strategies will provide NZX dairy traders with a more...


Derivatives are investment vehicles whose price is dependent on an underlying asset. The most common form of derivatives include stock options, futures & swaps. Options are contracts that give the holder the right but not the obligation to buy or sell a specific security at a pre-determined price on a pre-determined date. The two kinds of options are call and put options. A call holder has the right but not the obligation to “call” stock away from the call writer. So as the price of the underlying security, in this case a stock moves up (or down) the call option becomes worth more (or less). Since derivatives are essentially a contract with an associated value there are many forms of derivatives. Some companies use derivatives to hedge against natural resource price swings or fluctuations in weather that may affect yields.

Derivatives are used by investors to:

  • Provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative
  • Speculate and 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)
  • 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
  • Obtain exposure to the underlying where it is not possible to trade in the underlying (e.g., weather derivatives)
  • create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)

Example: A lease option to buy a house. The lease contract has terms that give you the right to buy the house at a specific price any time you want (until the lease contract expires). Suppose the terms stated that you could buy the house anytime within the first year of leasing from the owner for 100,000. If the price of the house (local real estate boom) increased to 150,000 you could buy the house for 100,000 and then sell it for 150,000 for a profit of 50,000. If the price of house price dropped (perhaps crime increase) you would have no incentive to exercise your option to buy, so you let that contract expire (worthless) and you do not buy the house. As illustrated here, the contract derives its value NOT from the paper on which it is written, but from the actual market price of another object (the house in this case). This is the basic premise for instruments of specualation known as derivatives.

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