HOW DERIVATIVES WORKS

A

abhishreshthaa

Abhijeet S
A SHORT STORY ABOUT DERIVATIVES:

A Farmer

  • A farmer will be ready with his wheat crop for selling in the market in four months but he does not want to guess what price he will receive then.

  • He wants to avoid this uncertainty and wants to know today, so that he can plan for tomorrow

An Investor

  • An investor wants to purchase a diversified portfolio of shares with cash he will receive three months hence.

  • But he wants to buy his portfolio at today's price and does not want to guess what will be the price of shares when he is ready with cash.

AND DERIVATIVES IS THE ANSWER FOR THIS!!!

WHAT ARE DERIVATIVES:

  • A Derivative is a Instrument Whose Value Is Derived From the Value of One or More Underlying variables Which Can Be Commodities, Precious Metals, Currency, Bonds, Stocks, Stock Indices Etc.

  • Are tradable “ Contracts "

  • Derived from a security but are not the security themselves

  • Cash settled or delivery of underlying

  • Exchange Traded or OTC.

OBJECTIVES OF DERIVATIVES:

  • Hedging/ Transfer of Risk

  • Better Price Discovery

  • Betting on the Future
 
abhishreshthaa said:
A SHORT STORY ABOUT DERIVATIVES:

A Farmer

  • A farmer will be ready with his wheat crop for selling in the market in four months but he does not want to guess what price he will receive then.

  • He wants to avoid this uncertainty and wants to know today, so that he can plan for tomorrow

An Investor

  • An investor wants to purchase a diversified portfolio of shares with cash he will receive three months hence.

  • But he wants to buy his portfolio at today's price and does not want to guess what will be the price of shares when he is ready with cash.

AND DERIVATIVES IS THE ANSWER FOR THIS!!!

WHAT ARE DERIVATIVES:

  • A Derivative is a Instrument Whose Value Is Derived From the Value of One or More Underlying variables Which Can Be Commodities, Precious Metals, Currency, Bonds, Stocks, Stock Indices Etc.

  • Are tradable “ Contracts "

  • Derived from a security but are not the security themselves

  • Cash settled or delivery of underlying

  • Exchange Traded or OTC.

OBJECTIVES OF DERIVATIVES:

  • Hedging/ Transfer of Risk

  • Better Price Discovery

  • Betting on the Future
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