Derivatives

RECENT NEWS
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,...
The Hindu Business Line  Jun 22  Comment 
In order to ease trading in the currency derivatives segment, capital market regulator SEBI has clarified that while the position limit linked to open interest shall be applicable at the time of openi...
Mondo Visione  Jun 22  Comment 
OSE is pleased to announce the go-live date of Next J-GATE, which is being developed to expand market liquidity and further improve reliability and convenience for investors, trading participants, and other market users. Based on the progress...
Financial Times  Jun 13  Comment 
Fresh capital requirements and futures trading exert pressure for change
Mondo Visione  Jun 10  Comment 
SIFMA’s Asset Management Group (SIFMA AMG) today announced the availability of a new template client document that asset management firms can use to comply with new informational and disclosure obligations required to onboard clients for...
Mondo Visione  Jun 9  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) has today announced the appointment of Katherine Tew Darras as General Counsel. As General Counsel, Ms. Tew Darras will lead ISDA’s efforts to develop the legal standards,...
Mondo Visione  Jun 9  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) has today appointed two senior executives from a central counterparty (CCP) and a futures commission merchant (FCM) to its Board of Directors. The new directors are John Dabbs,...




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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