Derivatives

RECENT NEWS
DailyFinance  Apr 3  Comment 
SAN FRANCISCO, CA -- (Marketwired) -- 04/03/14 -- Recommind, a leader in information intelligence, today launched Perceptiv Derivatives Contract Analysis, the world's first SaaS platform to provide investment banks with complete and...
Reuters  Apr 1  Comment 
Bitcoin derivatives trading platform BTC.sx has secured funding from Seedcoin Fund, BTC.sx Chief Operating Officer George Samman told Reuters on Tuesday.
Mondo Visione  Apr 1  Comment 
Singapore Exchange (SGX) today suspended trading on its derivatives market at 4.15 pm Singapore time due to a network hardware interruption, and the market re-started trading at 7.45 pm. We apologise for the inconvenience caused to...
Financial Times  Apr 1  Comment 
As new swaps are centrally cleared, so industry is accelerating push to get rid of old trades in an effort that is seen reducing overall systemic risk
New York Times  Mar 31  Comment 
The Libyan Investment Authority is suing Société Générale and other parties, saying it should be reimbursed for losses from soured derivatives because the bank paid bribes to associates of a son of the former Libyan dictator, Col. Muammar...
Mondo Visione  Mar 28  Comment 
The Commodity Futures Trading Commission (Commission) Division of Clearing and Risk (DCR) today issued a time-limited no-action letter to the Singapore Exchange Derivatives Clearing Limited (SGX-DC), a registered derivatives clearing...
Reuters  Mar 28  Comment 
Reuters Market Eye - Overseas investors bought Indian cash shares worth of 21.92 billion rupees on Thursday, provisional exchange data shows.
DailyFinance  Mar 26  Comment 
LOS ANGELES, CA -- (Marketwired) -- 03/26/14 -- A new study by the Milken Institute shows the benefits to the wider economy from the use of financial derivatives. "Deriving the Economic Impact of Derivatives: Growth Through Risk Management" is a...




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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