What is Derivatives Market?

1. What are derivatives?

2. Introduction In the world of finance derivative is a type of financial product whose value is linked to the underlying assets. Underlying assets meaning in a derivative or warrant is that it is a type of security, property, or other assets that influences the value of the derivative or warrant. For example, in an option giving one the right to buy stock in Johnson and Johnson, the underlying asset is the stock in Johnson and Johnson. The derivative is a bond between two parties and its value is derived from the fluctuations in the underlying assets. This presentation will give you a better idea of what are derivatives.

3. Types of derivatives • Forward Contracts: This type of derivative is a custom-made contract between two parties in which the settlement between the parties takes place in the future on any decided date. The price is decided beforehand and at the same price, the deal is made in the future • Future Contracts: Futures contract is quite self-explanatory and similar to forward contracts it is a deal made to buy or sell an underlying asset at a specified price on a future date. • Options Contracts: The features of options contracts are quite dissimilar as compared to the above two types of derivatives. In the other types of contracts, there is no mandate to discharge the contract on the specified or decided date. In this type, the parties can opt to buy or sell the asset but are not obliged to do so • Swap Contracts: Out of all the above various types of derivatives contracts mentioned above, the swap contracts are the most complicated. These contracts are made between the two parties privately. The parties decide a predetermined formula and exchange their cash flow according to the formula in the future.

4. Who should trade in derivatives? • Hedgers: The investors who are known to hedge a risk are called as hedgers. So the process of hedging is nothing but minimizing risk. Hedging involves tackling different parameters resultant from current market conditions which impact the risk factor. • Speculators: Speculators are the investors who scrutinize the price factor and after proper evaluation, they invest when the price factor is in favor of maximum gains. • Arbitrageurs: Arbitrageurs function a bit differently and in a swift manner and has the proficiencies of making instant decisions to generate better gains with minimal risk scenario. They are the investors who work towards improving liquidity in the market by making most of the arbitrage opportunities available for a specific period

5. Conclusion To conclude, we have understood the types of derivatives with examples and how they are the best hedging instruments. With these instruments, traders can predict the future after a better analysis of price movements eventually giving good profits. You should learn about derivatives even more to get a hold on the concept and become an active trader in the derivative markets.

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