Mondo Visione  May 10  Comment 
Derivatives play a critical role in helping to reduce the uncertainty that comes from changing interest rates and exchange rates, as well as credit, commodity and equity prices.
Mondo Visione  May 9  Comment 
The Ontario Securities Commission (OSC) today announced that it will hold a roundtable to discuss stakeholder input on the CSA Notice and Request for Comment on Proposed National Instrument 93-101 Derivatives: Business Conduct (NI ...
Mondo Visione  May 9  Comment 
Singapore Exchange (SGX) announced today that Waterland Futures Company Limited (WLF) has become a Trading Member in its derivatives market. Established in 1993, Taipei-based WLF focuses on three main areas in futures and options – brokerage,...
Mondo Visione  May 8  Comment 
The steps that could be taken to make the derivatives market more efficient and less complex will be debated by senior regulators and market executives at ISDA’s 32nd annual general meeting (AGM) in Lisbon on May 8-10. With the Group of 20...
Mondo Visione  May 4  Comment 
Organisations representing more than 8,000 companies across Europe have welcomed today’s EMIR proposals by the Commission as an important step forward in relieving burdens for businesses which use derivatives to manage their commercial and...
The Hindu Business Line  May 3  Comment 
The Securities Appellate Tribunal (SAT) today admitted Reliance Industries' (RIL) appeal against a ban on trading in the equity derivatives market for a year imposed by the Securities and Exchange Bo...
Mondo Visione  May 2  Comment 
Eurex expands its executive management team. On May 1, Romanos Daniel took on the role as Chief Innovation Officer at Europe’s largest derivatives exchange, which is part of Deutsche Börse Group. As a Member of the Executive Board, he will...
The Economic Times  Apr 25  Comment 
FPIs held over 2.23L net long contracts in futures segment, the highest this year, on March 23.
Mondo Visione  Apr 20  Comment 
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, has today published its annual report into the global derivatives market. Highlights of the report are as...


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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