Derivatives

RECENT NEWS
Mondo Visione  4 hrs ago  Comment 
Today we are approving the registration of Eurex Clearing. I am very pleased that Eurex has chosen to register with the CFTC, and that the Commission has unanimously approved this application. Eurex Clearing is one of the leading...
The Times of India  4 hrs ago  Comment 
The four brokers can only reduce their positions, the bourse said in a statement.
Mondo Visione  Jan 29  Comment 
OSE is pleased to announce the go-live date of Next J-GATE. Steady progress has been made on Next J-GATE, which is being developed to expand market liquidity and further improve reliability and convenience for investors, trading participants, and...
Financial Times  Jan 27  Comment 
Europe asked to co-ordinate regulations with the US
Wall Street Journal  Jan 27  Comment 
Weaker-than-expected fourth-quarter results in Deutsche Bank’s equity derivatives and structured-finance businesses weighed on its investment bank, according to people familiar with the matter.
The Hindu Business Line  Jan 27  Comment 
The Sensex and the Nifty ended flat in a volatile session on Wednesday as investors avoided risky bets ahead of the expiry of January derivatives contracts on Thursday and a US Federal Reserve policy...
Mondo Visione  Jan 22  Comment 
Securities regulators in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (the participating jurisdictions) today announced the...
Mondo Visione  Jan 22  Comment 
Yesterday, EEX has reached a new daily record on its Power Derivatives Market. On 21 January 2016, a total volume of 27,136,561 MWh was traded. The previous record of 22,656,700 MWh was registered on 12 November 2015. Furthermore, on the German...
Mondo Visione  Jan 21  Comment 
Members of the Canadian Securities Administrators (CSA) today published for comment Proposed National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Positions and Collateral and its companion policy (the proposed...
Mondo Visione  Jan 21  Comment 
Clearing and portfolio compression are having an increasingly significant effect on the interest rate derivatives (IRD) market, with more than two-thirds of IRD notional outstanding now cleared and compression reducing the size of the market by...




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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