In the financial world, we find various investment instruments called derivatives. It is defined as financial derivative or derivative financial products to those whose value is based on the price of another asset. This means that financial derivatives are instruments whose price or value is not determined directly but depend on the price of another asset which we call the underlying asset. The underlying asset can be a stock, a stock index, a commodity or any other financial asset such as currencies, bonds and interest rates. The main function of the derivatives market is to provide financial investment instruments and provide for adequate coverage of risk management. Among the most popular underlying asset find the actions of the stock exchanges, currencies, stock indexes, the values of fixed income to commodities, and interest rates.
Main features of financial derivatives.
Financial derivatives have the following general characteristics, namely: Financial derivatives require very little initial investment compared to other types of contracts that have a similar response to changes in general market conditions. This phenomenon allows the investor to have higher profits and higher losses if the transaction is not developed as I thought. The value of the derivative changes in response to changes in the price of the underlying asset. Currently there are derivatives on all asset classes such as currencies, commodities, stocks, stock indices, precious metals, etc. Derivatives can be traded both organized stock exchanges or organized or not also called counter markets. Like any contract, the derivatives are settled at a future date.
Role of Financial Derivatives.
We can classify financial derivatives based on different parameters. The most common are:
1. Derivatives according to the type of contract involved:
c. Contracts for difference.
2. Depending on where derivatives are traded and traded:
Derivatives traded on organized markets: Here are standardized contracts on underlying assets that were previously authorized. Furthermore, both the exercise price and the maturity of the contracts are the same for all participants. The operations are performed on an exchange or regulated and organized center such as the Chicago Mercantile Exchange in the United States, where he traded derivatives and futures contracts. Derivatives contracted in unorganized or OTC markets: These are derivatives whose contracts and specifications are tailored to suit the parties to the derivative contract. In these markets there is no standardization and parties often set the conditions that favor them more.
3. Derivatives as the underlying asset involved:
Financial derivatives: contracts are those that employ financial assets such as stocks, currencies, bonds, and interest rates. Non-financial derivatives: a commodity or commodities as underlying assets that run from agricultural commodities such as corn and soybeans to cattle are included in this category also energy commodities such as oil and gas, and metals precious as gold and platinum.
4. Derivatives according to the purpose:
Hedge derivatives: These derivatives are used as a tool for risk reduction. In this case an opposite position in a futures against the underlying asset of the derivative standing. Arbitration Derivatives: These derivatives are used to take advantage of the price difference between two or more markets. By arbitration participants in the market can make a profit virtually risk free. Profits are generated due to the difference in market prices. Trading derivatives: These derivatives are traded in order to profit by speculating the price of the underlying asset involved in the contract.
A Future is the acquisition of a commitment to buy or sell a given amount of foreign currency at a fixed Price. An Option provides, for a fee,...
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