Mondo Visione  8 hrs ago  Comment 
Fidessa group plc (LSE: FDSA) today announced the launch of a powerful new order analytics service for its derivatives community that brings greater precision to the control and measurement of derivatives algos. Order execution is increasingly...
Financial Times  Jun 4  Comment 
Regulator set to extend industry deadline for swaps clearing until August 2017
Mondo Visione  Jun 2  Comment 
NGM was awarded the Nordic prize for Best Educational Initiative for their education in structured products. NGM received the award at the Nordic Structured Products & Derivatives Conference 2015 which was held at Grand Hotel in Stockholm on...
Mondo Visione  Jun 1  Comment 
On 1 June 2015 Moscow Exchange introduced 'Cancel On Disconnect' (COD) functionality on the Derivatives Market. The functionality now provides automatic order cancellation on the Derivatives Market"s trading system (SPECTRA) for anonymous...
Mondo Visione  May 29  Comment 
The Chicago Board Options Exchange® (CBOE®) was named "Derivatives Exchange of the Year -- Americas" Thursday night at GlobalCapital's ( Americas Derivatives Awards 2015 ceremony in New York City. According to...
Mondo Visione  May 29  Comment 
The European Union’s derivatives markets are becoming more transparent through the public availability of harmonised aggregate data reported to the six trade repositories (TRs) registered with the European Securities and Markets Authority (ESMA)...
The Times of India  May 28  Comment 
With an agrararian crisis looming over the country’s farm production, Reserve Bank of India has asked banks to ensure that borrowers engaged in activities related to agriculture are hedging agaist agri commodity price risk using derivatives.
Financial Times  May 28  Comment 
Banks pull back from swaps with smaller players
Reuters  May 28  Comment 
The Nifty fell for a fourth day in a volatile session marked by the expiry of monthly derivatives contracts, even as growing concerns over lacklustre corporate earnings hurt sentiment.
Mondo Visione  May 27  Comment 
There could be a temporary delay in the  Derivatives Market data display for some clients from 11:42 until 11:45 MSK. The delay was caused by re-start of one of redundant data distribution servers. Please accept our apologies for any...


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.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki