What is Derivatives Market?

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What are derivatives?
2
Introduction

• In the world of finance derivative is a type of
  financial product whose value is linked to the
  underlying assets. Underlying assets meaning in a
  derivative or warrant is that it is a type of
  security, property, or other assets that
  influences the value of the derivative or
  warrant.
• For example, in an option giving one the right to
  buy stock in Johnson and Johnson, the underlying
  asset is the stock in Johnson and Johnson. The
  derivative is a bond between two parties and its
  value is derived from the fluctuations in the
  underlying assets.
• This presentation will give you a better idea of
  what are derivatives.

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Types of derivatives

• Forward Contracts This type of derivative is a
  custom-made contract between two parties in which
  the settlement between the parties takes place in
  the future on any decided date. The price is
  decided beforehand and at the same price, the
  deal is made in the future
• Future Contracts Futures contract is quite
  self-explanatory and similar to forward contracts
  it is a deal made to buy or sell an underlying
  asset at a specified price on a future date.
• Options Contracts The features of options
  contracts are quite dissimilar as compared to the
  above two types of derivatives. In the other
  types of contracts, there is no mandate to
  discharge the contract on the specified or
  decided date. In this type, the parties can opt
  to buy or sell the asset but are not obliged to
  do so
• Swap Contracts Out of all the above various
  types of derivatives contracts mentioned above,
  the swap contracts are the most complicated.
  These contracts are made between the two parties
  privately. The parties decide a predetermined
  formula and exchange their cash flow according to
  the formula in the future.

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Who should trade in derivatives?

• Hedgers The investors who are known to hedge a
  risk are called as hedgers. So the process of
  hedging is nothing but minimizing risk. Hedging
  involves tackling different parameters resultant
  from current market conditions which impact the
  risk factor.
• Speculators Speculators are the investors who
  scrutinize the price factor and after proper
  evaluation, they invest when the price factor is
  in favor of maximum gains.
• Arbitrageurs Arbitrageurs function a bit
  differently and in a swift manner and has the
  proficiencies of making instant decisions to
  generate better gains with minimal risk scenario.
  They are the investors who work towards improving
  liquidity in the market by making most of the
  arbitrage opportunities available for a specific
  period

5
Conclusion

• To conclude, we have understood the types of
  derivatives with examples and how they are the
  best hedging instruments. With these instruments,
  traders can predict the future after a better
  analysis of price movements eventually giving
  good profits.
• You should learn about derivatives even more to
  get a hold on the concept and become an active
  trader in the derivative markets.

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THANK YOU