Derivative

Derivative: Definition
Derivative

is a word formed from

another word
Derivative is something that comes from
something else, a substance that is
made from another substance
A derivative is an instrument whose
value depends on, or is derived from,
the value of another asset.

Derivative: Components
Underlying

Assets (Depends, Derived)

Legal Contract between Two or More
Parties
Long (Buy) and Short (Sell)
Agreed Price

Derivative: How it traded?

On

exchanges traded derivative markets

In the over-the-counter (OTC) market
where traders working for banks, fund
managers and corporate treasurers
contact each other directly

Derivative: Benefit
To

Hedge Risk (Level of Risk)

To speculate (take a view on the future
direction of the market)
To lock in a profit or loss

Types of Types
Derivatives
Derivative:
Commitment

Forwards,
Futures,
Swaps,
Options

Derivatives Commitment
Types
Derivative Commitments are contracts
entered into at one point in time that
require:
.Engage in a transaction at a later point in
time (expiration) on terms agreed upon at
the start
.The parties establish the identity and
quantity of the underlying
.Fixed price at which underlying will be
exchanged (forward price)

1.

Derivative Type: Forward

Forward

is a derivative contract in which

two parties agree that the buyer party
will purchase an underlying asset from
the seller party at a later date at a fixed
price they agree on what contract
signed.

Derivative Type: Futures

Futures

is a standardized contract created

and traded on a future exchange in which
two parties that the buyer party will
purchase an underlying asset from the
seller party at a later date and at a price
agreed when the contract is initiated and
which there is daily setting of gains and
loses and a credit guarantee by the futures
exchange through its clearinghouse

Types of Trader
Hedgers
Speculators
Arbitrageurs