Derivatives

RECENT NEWS
Mondo Visione  Apr 11  Comment 
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, will hold its 34th IOMA Clearing & Derivatives Conference next week.  The invitation-only event will take...
Mondo Visione  Apr 4  Comment 
The Canadian Securities Administrators (CSA) today published for comment Proposed National Instrument 93-101Derivatives: Business Conduct and a related proposed companion policy. The proposed instrument establishes an investor protection regime...
Financial Times  Apr 3  Comment 
LSE comes under pressure to reopen talks over the sale of its French clearing house
Mondo Visione  Apr 3  Comment 
The Derivatives Service Bureau today opened the DSB User Acceptance Testing (UAT) platform to the industry with a revised and updated set of product templates that are consistent with MiFID II requirements. The UAT platform is a functionally...
Mondo Visione  Apr 2  Comment 
The Financial Markets Authority has today confirmed that businesses selling short-duration derivatives need to be licensed. The Financial Markets Conduct Act introduced licensing for derivatives issuers in December 2014. The FMA has been...
Forbes  Mar 29  Comment 
Former CFTC Enforcement Chief Aitan Goelman told Reuters that there’s a “massive amount of misconduct in the marketplace we’re just not pursuing.” But the CFTC doesn’t have the funds to investigate and litigate many major cases any more.
The Economic Times  Mar 25  Comment 
Market regulator Sebi has barred the country's second most-valued firm as well as 12 other entities from equity derivatives trading for one year.
The Economic Times  Mar 23  Comment 
Experts are taking a cue from the rise in the ratio of stocks traded in the derivative market versus the index to gauge the quantum of leveraged positions.
The Economic Times  Mar 20  Comment 
A put option is purchased when a trader expects an underlier - in this case the dollar - to fall.




RELATED WIKI ARTICLES
 

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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