The Future Option - Derivatives

[abhishreshthaa]

DERIVATIVES:

• A Derivative is an Instrument Whose Value Is Derived From the Value of One or More Underlying Which Can Be Commodities, Precious Metals, Currency, Bonds, Stocks, Stock Indices Etc.
  
• Four Most Common Examples of Derivative Instruments Are

Forwards

Futures

Options

Swaps.


NEED FOR DERIVATIVES:

• PRICE RISK(UNSYSTEMATIC& SYSTEMATIC)
  
  
• LIQUIDITY RISK
  
  
• COUNTERPARTY (CREDIT) RISK (ON THE BROKER &ON THE EXCHANGE)
  
  
• CASH OUT-FLOW RISK
  
  
• OPERATING RISK

BENEFITS:

• DERIVATIVES AS MEANS OF HEDGING
  
  
• IMPROVES MARKET EFFICIENCY AND LIQUIDITY
  
  
• ALLOWS INSTITUTION TO RAISE CAPITAL AT LOWER COST
  
  
• ALLOWS EXCHANGES TO OFFER DIFFERENTIATED PRODUCTS
  
  
• ASSISTS IN CAPITAL FORMATION IN THE ECONOMY
  
  
• IMPROVED ROI(in the books) FOR INSTITUTIONS
  
  
• RISK SHARING
  
  
• IMPLEMENTATION OF STRATEGIES
  
  
• INFORMATION GATHERING
  

DISADVANTAGE :

• CREDIT RISK
  
  
• MARKET RISK
  
  
• LEGAL RISK