DERIVATIVE SEGMENT – 2

PRODUCTS IN DERIVATIVES

1 . FORWARDS – It is a contract agreement between two parties to buy /sell an underlying asset at a certain future date for a particular price that is pre-decided on the contract date. both contracting parties are committed and are obliged to honor the transaction irrespective of the underlying asset’s price at the time of delivery.

FUTURES- A future contract similar to forwards, expects that the deal is made through an organized and regulated exchange rather than being negotiated directly between two parties.

OPTIONS – An option is a contract that gives the right, but not the obligation, to buy or sell the underlying on or before a stated date or at the stated price while the buyer of the option pays the premium and the seller receives the premium.

SWAPS – It is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. it helps market Participants manage risk associated with the volatile interest rates.

MARKET PARTICIPANTS

HEDGERS – They face risk associated with the prices of underlying assets and use derivatives to reduce their risk. corporations, investing institutions, and Banks all use derivatives products to hedge or reduce risk.

2 . SPECULATORS / TRADERS– They try to predict the future movement of the market and take a position in derivatives derivatives are preferred over the underlying asset for trading purposes.

3 . ARBITRAGEURS– IT is a deal in a product profits by exploiting a price difference in a product in two different markets This type of person purchases an asset Cheaply in one location and simultaneously arranges to sell it at a higher price in another location.

VARIOUS RISKS FACED BY THE PARTICIPANTS IN DERIVATIVE

Market participants must understand that derivatives, being leveraged instruments, have risks like counterparty risk, price risk, liquidity risk, legal or regulatory risk, and operational risk. A market participant should therefore consider whether such trading is suitable for him/her based on these parameters

-By

A Gowrish R Bhat