With differing values of national currencies, international traders needed a system to account for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses.
With differing values of national currencies, international traders needed a system of accounting for these differences. Today, derivatives are based upon a wide variety of transactions and have many more uses.
Financial derivatives market india a derivative is a category of security rather than a specific kind, there are several types of derivatives. As such, derivatives hold a variety of functions and applications, based on type.
Certain kinds of derivatives can be used for hedgingor insuring against risk on an asset. Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues.
For example, a European investor purchasing shares of an American company off of an American exchange using U. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.
One would generally use a futures contract to hedge against risk during a particular period of time. Fearing that the value of her shares would decline, Diana decides to arrange a futures contract to protect the value of her stock.
The futures contract can be considered a sort of bet between the two parties. Diana, on the other hand, has speculated poorly and lost a sizable sum.
Swaps are another common type of derivative. A swap is most often a contract between two parties agreeing to trade loan terms. For this reason, he or she might seek to switch their variable interest rate loan with someone else, who has a loan with a fixed interest rate that is otherwise similar.
Swaps can be made using interest rates, currencies or commodities. Options are another common form of derivative. An option is similar to a futures contract in that it is an agreement between two parties granting one the opportunity to buy or sell a security from or to the other party at a predetermined future date.
An option can be short or longas well as a call or put. A credit derivative is a loan sold to a speculator at a discount to its true value. Though the original lender is selling the loan at a reduced price, and will therefore see a lower return, in selling the loan the lender will regain most of the capital from the loan and can then use that money to issue a new and ideally more profitable loan.
If, for example, a lender issued a loan and subsequently had the opportunity to engage in another loan with more profitable terms, the lender might choose to sell the original loan to a speculator in order to finance the more profitable loan. In this way, credit derivatives exchange modest returns for lower risk and greater liquidity.
Another kind of derivative is a mortgage-backed securitywhich is a broad category defined by the fact that the assets underlying the derivative are mortgages. Limitations of Derivatives As mentioned above, derivative is a broad category of security, so using derivatives in making financial decisions varies by the type of derivative in question.
Generally speaking, the key to making a sound investment is to fully understand the risks associated with the derivative, such as the counterparty, underlying asset, price and expiration. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a portfolio strategy.What is a 'Derivative' A derivative is a financial currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives. A Study of Derivatives Market in India and its Current Position in Global Financial Derivatives initiativeblog.com 26 | Page.
The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives.
The legal nature of these products is very different, as well. A Study of Derivatives Market in India and its Current Position in Global Financial Derivatives Markets Ms. Shalini H S1, Dr.
Raveendra P V2 1Department of MBA, Krupanidhi School of Management, Bangalore, Karnataka, India. 2Department of MBA, M.S.R.I.T, Bangalore, Karnataka, India. emergence of derivatives market is an ingenious feat of financial engineering that provides an effective and less costly solution to the problem of risk that is embedded in the .
PONDICHERRY UNIVERSITY (A Central University) DIRECTORATE OF DISTANCE EDUCATION Financial Derivatives Market in India – Need for Derivatives – Evolution of more than times gross domestic product of India.
Financial derivatives like futures, forwards options and .