Derivatives

RECENT NEWS
Mondo Visione  Jul 11  Comment 
Overall credit terms and conditions offered to all counterparty types tightened slightly, reflecting less favourable price and non-price credit terms across the entire spectrum of securities financing and OTC derivatives markets In the...
Mondo Visione  Jul 7  Comment 
The Canadian Securities Administrators (CSA) today published for comment CSA Consultation Paper 95-401 Margin and Collateral Requirements for Non-Centrally Cleared Derivatives. The Consultation Paper proposes a framework for the calculation and...
Financial Times  Jul 5  Comment 
UK central bank says Basel rules could force banks to raise prices or exit market
Mondo Visione  Jul 1  Comment 
Securities regulators in Alberta, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and Yukon yesterday announced the adoption of amendments to Multilateral Instruments 91-101 Derivatives:...
Mondo Visione  Jul 1  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its EMEA Credit Derivatives Determinations Committee resolved that a bankruptcy credit event occurred in respect of Portugal Telecom International Finance...
Mondo Visione  Jun 27  Comment 
Please be informed that the main clearing session for derivatives starts at 18:44:18  MSK precise time due to TCS servers time and precise time desynchronization. Orders for option expiration cancellation and OTM expiration to be placed from...
Mondo Visione  Jun 25  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published the following statement on the UK referendum vote to leave the European Union (EU), also known as Brexit. “The UK referendum vote for the UK to leave the EU is...
Mondo Visione  Jun 24  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published the following statement on the UK referendum vote to leave the European Union (EU), also known as Brexit. “The UK referendum vote for the UK to leave the EU is...
Mondo Visione  Jun 24  Comment 
The price limits for the futures contracts on GBP/USD have been changed. Contract Initial value Current value Price limit, basis points Min IM, % Price limit, basis points Min IM,...




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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