Description
Forwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to exchange an agreed quantity of an asset for cash at certain date in future at a predetermined price specified in that agreement
KINDS OF FINANCIAL DERIVATIVES
As already discussed, the important financial derivatives are
the following:
# Forwards
# Futures
# Options, and
# Swaps
FORWARDS : -
Forwards are the oldest of all the derivatives. A forward
contract refers to an agreement between two parties to
exchange an agreed quantity of an asset for cash at certain
date in future at a predetermined price specified in that
agreement. The promised asset may be currency,
commodity, instrument etc.
FUTURES : -
A futures contract is very similar to a forward contract in all
respect excepting the fact that it is completely a
standardized one. Hence, it is rightly said that a futures
contract is nothing but a standardized forward contract. It is
legally enforceable and it is always traded on an organized
exchange.
The term ?future trading‘ includes both speculative
transactions where futures are bought and sold with the
objective of making profits from the price changes and also
the hedging or protective transactions where futures are
bought and sold with view to avoiding unforeseen losses
resulting from price fluctuations.
A future contract is one where there is an agreement
between two parties to exchange any assets or currency or
commodity for cash at a certain future date, at an agreed
price. Both the parties to the contract must have mutual
trust in each other. It takes place only in organized futures
market and according to well-established standards.
As in a forward contract, the trader who promises to buy is
said to be in ?long position‘ and the one who promises to sell
is said to be in ?short position‘ in futures also.
SWAPS : -
Swap is yet another exciting trading instrument. In fact, it is
a combination of forwards by two counter parties. It is
arranged to reap the benefits arising from the fluctuations in
the market-either currency market or interest rate market
or any other market for that matter.
OPTIONS : -
A derivative transaction that gives the option holder the
right but not the obligation to buy or sell the underlying
asset at a price, called the strike price, during, a period or on
a specific date in exchange for payment of a premium is
known as ?option‘. Underlying asset refers to any asset that
is traded. The price at which the underlying asset is traded is
called the ?strike price‘.
doc_228928466.docx
Forwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to exchange an agreed quantity of an asset for cash at certain date in future at a predetermined price specified in that agreement
KINDS OF FINANCIAL DERIVATIVES
As already discussed, the important financial derivatives are
the following:
# Forwards
# Futures
# Options, and
# Swaps
FORWARDS : -
Forwards are the oldest of all the derivatives. A forward
contract refers to an agreement between two parties to
exchange an agreed quantity of an asset for cash at certain
date in future at a predetermined price specified in that
agreement. The promised asset may be currency,
commodity, instrument etc.
FUTURES : -
A futures contract is very similar to a forward contract in all
respect excepting the fact that it is completely a
standardized one. Hence, it is rightly said that a futures
contract is nothing but a standardized forward contract. It is
legally enforceable and it is always traded on an organized
exchange.
The term ?future trading‘ includes both speculative
transactions where futures are bought and sold with the
objective of making profits from the price changes and also
the hedging or protective transactions where futures are
bought and sold with view to avoiding unforeseen losses
resulting from price fluctuations.
A future contract is one where there is an agreement
between two parties to exchange any assets or currency or
commodity for cash at a certain future date, at an agreed
price. Both the parties to the contract must have mutual
trust in each other. It takes place only in organized futures
market and according to well-established standards.
As in a forward contract, the trader who promises to buy is
said to be in ?long position‘ and the one who promises to sell
is said to be in ?short position‘ in futures also.
SWAPS : -
Swap is yet another exciting trading instrument. In fact, it is
a combination of forwards by two counter parties. It is
arranged to reap the benefits arising from the fluctuations in
the market-either currency market or interest rate market
or any other market for that matter.
OPTIONS : -
A derivative transaction that gives the option holder the
right but not the obligation to buy or sell the underlying
asset at a price, called the strike price, during, a period or on
a specific date in exchange for payment of a premium is
known as ?option‘. Underlying asset refers to any asset that
is traded. The price at which the underlying asset is traded is
called the ?strike price‘.
doc_228928466.docx