Derivatives

RECENT NEWS
Mondo Visione  Nov 28  Comment 
From the viewpoint of further enhancing the convenience of market participants, OSE is developing rules to introduce the use of average prices with regard to derivatives trading. The revisions will allow trading participants to use average...
Reuters  Nov 27  Comment 
Reuters Market Eye - Outstanding positions remaining to roll over in futures are not as heavy compared to previous series, say analysts.
Reuters  Nov 27  Comment 
Reuters Market Eye - The BSE Sensex and Nifty are flat as investors are cautious ahead of derivative contract expiry on Thursday and economic data on Friday
Mondo Visione  Nov 26  Comment 
On 25 November, the volume on the EEX Power Derivatives Market amounted to 15,729,764 MWh. This is the highest daily volume since 20 January 2014 (18,493,204 TWh).
Mondo Visione  Nov 25  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today announced the publication of a set of key principles on the adequacy and structure of central counterparty (CCP) loss-absorbing resources and on CCP recovery and...
Reuters  Nov 25  Comment 
Reuters Market Eye - SEBI's move to align rules for offshore derivative instruments (ODIs) with new foreign investment norms raises worries about flows.
Reuters  Nov 24  Comment 
The Securities and Exchange Board of India (SEBI) said on Monday it is revising the rules for offshore derivative instruments (ODIs) to bring them in line with new foreign investment norms approved earlier this year.
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. 




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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