Derivatives

RECENT NEWS
Mondo Visione  56 min ago  Comment 
Singapore Exchange (SGX) welcomes Masterlink Futures Corporation to its derivatives market as a Trading Member. Chew Sutat, Head of Sales and Clients at SGX said, “The addition of Masterlink Futures to our derivatives market provides SGX with...
Bloomberg  Apr 10  Comment 
In a victory for banks, global financial regulators revised rules governing how much money must be set aside to cover losses by swaps traders, backing away from guidelines that firms warned would destabilize the $693 trillion ...
Mondo Visione  Apr 10  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its EMEA Credit Derivatives Determinations Committee resolved that a failure to pay credit event occurred in respect of JSC Alliance Bank. ISDA will publish...
Mondo Visione  Apr 9  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published two new research papers at its 29th Annual General Meeting in Munich that highlight the value of the over-the-counter (OTC) derivatives market. The Value of OTC...
Mondo Visione  Apr 9  Comment 
Global law firm Reed Smith’s derivatives team has advised ETF Securities on its ground-breaking new 3x Short and Leveraged Equity Securities ETP Platform.  This is one of the first new structured derivatives products to go through the revised...
Reuters  Apr 9  Comment 
A group of small brokerages and large commodities companies convinced lawmakers to tweak a rule that they say would have made derivatives trading more expensive for them and sent more business to Wall Street banks that already dominate the market.
Mondo Visione  Apr 8  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published the results of a survey of end-users on issues and trends in the over-the-counter (OTC) derivatives markets.  The release of the survey comes on the eve of ISDA’s...
Mondo Visione  Apr 7  Comment 
Click here to download Vienna Stock Exchange's derivatives market (detailed) statistics for March 2014.




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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