Derivatives

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Neha Thalla

Neha Thalla (Querist)
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29 December 2009 What are Derivatives? What does Trading in derivatives mean??

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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30 December 2009 The word "Derivatives" has emerged from "deriving." The transactions which are entered into on the basis of current price but are likely to settled later without any intention of delivery are called derivative transaction.

The purpose of derivative transactions to earn profit from price change or to secure the current price (hedging)in future to stop loss if the person is really trading in the item.

Neha Thalla

Neha Thalla (Querist)
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30 December 2009 Thanks a ton for replying Sir... Now that the price would be determined at a later date we wont be earning any profit out of these transactions... right??

Pras

Pras (Expert)
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08 April 2010 What Does Derivative Mean?
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. 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.

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Neha Thalla

Neha Thalla (Querist)
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09 April 2010 Thnq so much Mr.Pras for clearing my doubt...

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