Derivatives

RECENT NEWS
Channel News Asia  Nov 21  Comment 
The Singapore Exchange will introduce the SGX Platts PX CFR China Swaps and Futures on Dec 2 and a series of Polyolefin contracts on Jan 19 in 2015. 
Mondo Visione  Nov 20  Comment 
US Securities and Exchange Commission (SEC) class no-action relief allows London Stock Exchange Derivatives Market, and its eligible members, to offer certain US investors a number of option contracts Complements Group’s global derivatives...
The Economic Times  Nov 20  Comment 
National Stock Exchange included six additional stocks in equity derivatives segment effective November 28, as per the NSE circular.
Mondo Visione  Nov 19  Comment 
Derivatives connectivity and regulation specialist Message Automation Limited, today highlighted major challenges in the industry, with regulatory change and new market practices leading to fragmentation of OTC derivatives processing and data...
The Economic Times  Nov 11  Comment 
These proposals, aimed at curbing insider trading, will be discussed by the Sebi at its next board meeting on November 19.
Mondo Visione  Nov 5  Comment 
Fidessa group plc (LSE: FDSA) has today announced the release of a new paper entitled Defining algos in futures markets. Authored by Yuriy Shterk, Head of Derivatives Product Management for Fidessa in the Americas, it explores the growth of...
Mondo Visione  Nov 5  Comment 
Singapore Exchange (SGX) today said its derivatives market reopened for trading at 1900 Singapore time. The following schedule applies: 1900 Market Opens 0200 (6 November) Close




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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