Derivatives

RECENT NEWS
Reuters  Apr 20  Comment 
Singapore Exchange Ltd (SGX) reported a 21 percent rise in Jan-March net profit, boosted by a strong performance in its derivatives and securities segment, which boosted profit to the highest in 10 years.
Mondo Visione  Apr 19  Comment 
The Canadian Securities Administrators (CSA) today published for comment Proposed National Instrument 93-102 Derivatives: Registration and Proposed Companion Policy 93-102 Derivatives: Registration (collectively, the Proposed Instrument). The...
Channel News Asia  Apr 19  Comment 
Morgan Stanley on Thursday will seek to have a suit against it for 2.7 billion euros (US$3.34 billion) in damages thrown out of an Italian administrative court, three sources close to the case told Reuters.
The Economic Times  Apr 19  Comment 
The arbitrage is helping deepening the domestic currency market.
Mondo Visione  Apr 17  Comment 
The World Federation of Exchanges ("WFE"), the global industry group for exchanges and central counterparties (CCPs), published its annual WFE IOMA Derivatives Market Report today, which shows the total volume of derivatives traded in 2017...
The Economic Times  Apr 12  Comment 
The move comes in the wake of a joint decision taken by Indian exchanges to stop licensing their indices and provide market data to foreign exchanges by August.
Mondo Visione  Apr 11  Comment 
The International Swaps and Derivatives Association, Inc. (ISDA) today published a statement from its Board of Directors on reported instances of narrowly tailored credit events and a process to consider improvements to the efficiency of the...
The Hindu Business Line  Apr 11  Comment 
The Singapore Exchange on Wednesday said it would list Indian equity derivative products in June, nearly two months after India's three main bourses
Mondo Visione  Apr 6  Comment 
We are aware of a growing number of UK firms offering so-called cryptocurrencies and cryptocurrency-related assets. As indicated in our Feedback Statement on DLT, cryptocurrencies are not currently regulated by the FCA provided they are not part...




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.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki