Derivatives

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Yahoo  Dec 17  Comment 
A top Democrat in the U.S. House of Representatives on Tuesday said unpopular Wall Street banks got a long-sought rollback to Dodd-Frank reforms through Congress last week partly by leveraging the influence ...
Mondo Visione  Dec 15  Comment 
The U.S. Commodity Futures Trading Commission (CFTC) is asking for public comment on related applications submitted by LedgerX, LLC (LedgerX), for registration as a derivatives clearing organization and registration as a swap execution facility....
The Economic Times  Dec 15  Comment 
The disruption was the second recent incident to hit the exchange after a glitch affected the calculation and dissemination of its main indices on Nov. 27.
The Economic Times  Dec 15  Comment 
Euronext is currently experiencing issues," it said in a statement at 0745 GMT. Some index derivatives trading such as the CAC40 future normally open at 0700 GMT.
Forbes  Dec 13  Comment 
Wall Street banks like Citigroup and JP Morgan Chase have flexed the power of their influence to pressure Congress and the White House into a key change in the law that will allow the trading of risky financial derivatives in bank operations that...
Wall Street Journal  Dec 12  Comment 
Wall Street’s victory on Capitol Hill this week means big banks can keep booking profits by running derivatives through taxpayer-supported depository units. The political cost, however, may be steep.
Mondo Visione  Dec 12  Comment 
Hong Kong Exchanges and Clearing Limited (HKEx) completed the rollout of its HKEx Orion Market Data Platform (OMD) on 1 December 2014 with OMD's extension to support the derivatives market at HKEx.  The previous launches supported HKEx's...




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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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