Derivatives

DERIVATIVES

-A derivative is a financial instrument

-It derives its value from the underlying asset

-Types of derivative are Future,Option,Forward

-Eg of underlying asset are equity,currency,interest rates

-As the rates of the underlying asset fluctuates in the market, the value of derivative instruments also moves

-For example, the changing value of a crude oil futures contract depends primarily on the upward or downward movement of oil prices.

-Rather than trading in underlying asset itself,traders enters into an agreement betting the future price at which he thinks it will go

-And on that future date he will either purchase or sell(as per the agreement) or round off his position in agreement

-For eg: Current market price of XYZ ltd share in cash market 200/-...A derivative trader made an agreement with Mr. Q to buy such share at 180/-after a month...after a month he will purchase that share at 180/-...if at that time Market value of such share is 220/- he will make a profit of 40/- or if its market value is 150/- he will be at loss of 30/-.