Derivatives

RECENT NEWS
Mondo Visione  May 26  Comment 
Today, the CFTC has taken a significant step toward finalizing its rules on position limits this year. The supplemental rule we have unanimously proposed today would ensure that commercial end-users can continue to engage in bona fide hedging...
Reuters  May 19  Comment 
India's capital market regulator on Thursday took steps to stop suspected illegal money flowing into the country by making issuers of securities known as offshore derivative instruments register their customers.
Mondo Visione  May 18  Comment 
Please note that the Derivatives Market evening trading session will begin five minutes later, i.e. at 7:05 pm MSK, on 25 May 2016, as these are the last trading days for options contracts (in accordance with clause 7.2 of the Rules of organized...
Mondo Visione  May 17  Comment 
Montréal Exchange today announced the appointment of Luc Fortin as Managing Director, Derivatives Trading, effective June 27, 2016. Mr. Fortin will be responsible for developing and deploying strategies to grow the derivatives business. He will...
The Hindu Business Line  May 15  Comment 
Three SEBI panels working on developing the instruments
The Hindu Business Line  May 13  Comment 
Provision not only in Mauritius pact, but in all other DTAAs too, says Revenue Secretary
The Economic Times  May 13  Comment 
The reworked India-Mauritius tax treaty has kept out derivatives and non-share securities like debentures from levy of capital gains tax in India.
Mondo Visione  May 12  Comment 
The Ontario Securities Commission (OSC) today published final amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (TR Rule) and its companion policy. The amendments will increase transparency in the Canadian...
The Hindu Business Line  May 12  Comment 
The Nifty 50 index is the world’s most actively traded derivatives contract, according to a survey titled 'Derivatives Market Survey', conducted by the World Federation of Exchanges (WFE) and Interna...




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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