Financial Derivatives and the Future Market
INTRODUCTION
Due to the wave of globalization and liberalization, multiple growth in the volume of international trade and business is recorded all over the world. As a result , the demand for the international money and finance instruments increased significantly at the global level. Changes in stock market prices, interest rate and exchange rates at the different financial market have increased the financial risk to the corporate world. In order to manage to such risks, the new financial instruments have been developed in the financial markets, which are popularly known as DERIVATIVES. As Financial Instruments, Derivatives has become very important in last two decades or so. Though the practice of using Derivatives is very old but formal application of these instruments in financial engineering came only recently. A lot of academic research have been carried out on the various aspects of the financial derivatives. Understanding their applications, uses and misuses constitutes an important part of study of the financial engineering.
Before explaining the term financial derivatives, let us see the dictionary meaning of ‘Derivatives’. Webster’s dictionary states that the word derivative is formed by derivation. It means something has to be derived or arisen out of underlying variables. For example, financial derivative is an instrument derived from the financial market. Derivatives are structurally related to other substances: the substance that can be made from another substance in one or more steps. In case of financial derivatives they are derived from the combination of cash market instruments or other derivative instruments.
FEATURE OF FINANCIAL DERIVATIVES
• Realated to Future: A Derivative instrument relates to the future contracts between two parties. It means there must be some contracts binding on the parties and same to be fulfilled in future.
• Value Derived from Underlying Asset: The
Due to the wave of globalization and liberalization, multiple growth in the volume of international trade and business is recorded all over the world. As a result , the demand for the international money and finance instruments increased significantly at the global level. Changes in stock market prices, interest rate and exchange rates at the different financial market have increased the financial risk to the corporate world. In order to manage to such risks, the new financial instruments have been developed in the financial markets, which are popularly known as DERIVATIVES. As Financial Instruments, Derivatives has become very important in last two decades or so. Though the practice of using Derivatives is very old but formal application of these instruments in financial engineering came only recently. A lot of academic research have been carried out on the various aspects of the financial derivatives. Understanding their applications, uses and misuses constitutes an important part of study of the financial engineering.
Before explaining the term financial derivatives, let us see the dictionary meaning of ‘Derivatives’. Webster’s dictionary states that the word derivative is formed by derivation. It means something has to be derived or arisen out of underlying variables. For example, financial derivative is an instrument derived from the financial market. Derivatives are structurally related to other substances: the substance that can be made from another substance in one or more steps. In case of financial derivatives they are derived from the combination of cash market instruments or other derivative instruments.
FEATURE OF FINANCIAL DERIVATIVES
• Realated to Future: A Derivative instrument relates to the future contracts between two parties. It means there must be some contracts binding on the parties and same to be fulfilled in future.
• Value Derived from Underlying Asset: The