What is Derivatives and Types

Question

Accepted Answer

Derivatives are financial instruments whose value is derived from an underlying asset. Types include futures, options, swaps, and forwards.

Derivatives are contracts between two parties that derive their value from an underlying asset.
They are used for hedging, speculation, and arbitrage.
Types of derivatives include futures contracts, options contracts, swaps, and forwards.
Futures contracts are agreements to buy or sell an asset at a predetermined price on a future date.
Options contracts give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified period.
Swaps involve the exchange of cash flows or liabilities between two parties.
Forwards are agreements to buy or sell an asset at a predetermined price on a future date, similar to futures contracts but not standardized.

Accepted Answer

Derivatuive is a type of financial instrument where its values is derived from its underlying asset. it is a contract between two people where the value of contract is determined by the prise of something else

there are 4 typoes of derivaties

Forward

Future

Option

Swaps

Accepted Answer

Derivatives are financial contract between two or more parties whose value is dependent upon an underlying financial asset (like a security) or group of assets (like an index).

Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.

The derivatives contracts are widely used to speculate and make good returns. These are used for various purposes like hedging, access to additional assets, etc

Types of derivatives are Forwards, Futures, Options and Swaps.

Forwards:

When two parties enter into an agreement to buy or sell an underlying asset at a specified date and at an agreed price in the future, it is termed as a forward contract.

The forward contracts are customised and have high counterparty risk.

Futures:

Just like the forward contract, a futures contract is an agreement to buy or sell an underlying instrument at a specified price on a future date. In the futures contract, the buyer and seller are not required to meet each other to enter into an agreement. the agreement between them is done via exchange.

Since there is a standardised contract in the, the counterparty risk is very low.

Options:

Options contracts are very different from futures and forwards contracts as there is no compulsion to discharge the contract on a certain date.

Options contracts are those contracts that give the right but not the obligation to buy or sell an underlying asset.

There are two types of options: call and put. In the call option, the buyer has the right to buy an underlying asset at a price determined while entering the contract. While in the put option, the buyer has the right but not the obligation to sell an underlying asset at a price determined while entering the contract.

In both the contracts the buyer has the option to settle the contracts on or before the expiry period. Therefore anyone trading in the options contract has the option of taking any of the 4 positions i.e. long or short in either the put option or the call option. Options are traded at over the counter market and at the stock exchange.

Swap:

A swap is an agreement between two counterparties to exchange financial instruments or cashflows or payments for a certain time.

Different Types of Swaps

Interest Rate Swaps.

Currency Swaps.

Commodity Swaps.

Credit Default Swaps.

Zero Coupon Swaps.

Total Return Swaps.

The Bottom Line.

What is Derivatives and Types

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