Derivatives

RECENT NEWS
Mondo Visione  Feb 26  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published a paper that outlines a number of key principles and initiatives for regulators, market participants and industry service providers in order to further improve...
The Economic Times  Feb 26  Comment 
The decline in rollover costs in this expiry indicates traders were less willing to carry forward their long positions to the March series.
Commodity Online  Feb 26  Comment 
Two economic-financial bottlenecks came to mind. No doubt you and rsquo;ve heard about the cratering Baltic Dry Index and the ongoing dock delivery failures on the West Coast. These may turn out to be good indicators of the underlying health and...
The Times of India  Feb 25  Comment 
After jumping over 265 points in early trade, the benchmark Sensex on Wednesday frittered away most of the gains and ended with a marginal 3.33 point rise at 29,007.99 on nervousness ahead of Union Budget and monthly derivative contracts expiry.
The Times of India  Feb 24  Comment 
Brokers said fresh buying by investors and covering-up of short positions by speculators in view of February's month expiry in the derivatives segment on Thursday helped stocks to recover.
The Hindu Business Line  Feb 22  Comment 
Derivatives can be used to protect your wealth against swings in interest rates, the rupee or stock markets
Mondo Visione  Feb 20  Comment 
Staff of the U.S. Commodity Futures Trading Commission (CFTC) will hold a public roundtable on March 5, 2015, from 9:00 a.m. to 5:00 p.m., to discuss issues related to recovery and orderly wind-down of Derivatives Clearing Organizations (DCOs)....
Mondo Visione  Feb 20  Comment 
Moscow Exchange's Derivatives Market is revamping its approach to the exercise of options. Beginning in March 2015, all options expiring in the money[1] will be exercised automatically. The change marks a significant shift from the...
Mondo Visione  Feb 17  Comment 
Osaka Exchange, Inc. (OSE) will partially revise the Business Regulations, etc. in connection with the Introduction of Average Price with regard to Derivatives Trading. An outline of the revisions is as follows. Outline of...
Mondo Visione  Feb 12  Comment 
Members of the Canadian Securities Administrators (CSA) today published for comment Proposed National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (the Clearing Rule). The Clearing Rule describes requirements for...




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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