Derivatives

RECENT NEWS
Mondo Visione  Jul 20  Comment 
On 21 September 2017, EEX will enhance its Power Derivatives offering for the European market with additional Power Futures and extended Power Option maturities. > Download Customer Information
Mondo Visione  Jul 19  Comment 
Today, EEX has launched Inter-Product-Spreads with guaranteed execution related to Central-/Eastern-European Power Futures. The new spread products enable trading participants to trade price differences between the different market areas more...
Mondo Visione  Jul 14  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its Americas Credit Derivatives Determinations Committee resolved that a failure to pay credit event occurred in respect ofcredit derivative transactions that...
The Economic Times  Jul 12  Comment 
While the cash market has grown at an annual compounded growth rate of 11 per cent since 2004-05, the same for equity derivatives is over 35 per cent.
The Economic Times  Jul 11  Comment 
Derivative analysts said there could be more short covering in the coming sessions.
Mondo Visione  Jul 10  Comment 
The European Securities and Markets Authority (ESMA) has today issued final regulatory technical standards (RTS) regarding the aggregation and publication of derivatives data by trade repositories (TRs). ESMA’s RTS define the operational...
The Economic Times  Jul 9  Comment 
Besides, the watchdog has said that existing positions on unhedged P-Note derivatives have to be liquidated by the end of December 2020.
The Hindu Business Line  Jul 8  Comment 
P-Note issuances on derivatives where it is done for hedging purpose and underlying shares are held by FPIs allowed
The Economic Times  Jul 7  Comment 
The regulator has also clarified on existing ODIs (Offshore Derivative Instruments), also known as participatory notes, where the underlying assets are derivatives.
The Hindu Business Line  Jun 30  Comment 
Give more headroom to options




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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