Derivatives:
In this vlog we will Learn about Financial Derivatives. Financial Derivatives is a financial instrument whose value is derived from the value of another asset, which is known as underlying asset.
Derivatives is not a product. it is a contract that derives its value from changes in the price of the underlying asset.
Traders in the Derivatives market
HEDGER:
A hedger is someone who faces risk associated with price movement of an asset & who uses derivatives as means of reducing risk. They provide economic balance to the market.
SPECULATOR:
A trader who enters the futures market for pursuit of profits, accepting risk in the endeavor. They provide liquidity & depth to the market.
ARBITRGEUR:
A person who simultaneously enters into transactions in two or more markets to take advantage of the discrepancies between prices in these markets.
- Arbitrage involves making profits from relative mispricing.
- Arbitrage also help to make markets liquid, ensure accurate & uniform pricing & enhance price stability.
- They help in bringing about price uniformity & discovery.
Economics Benefits of Derivatives:
- Reduces risk
- Enhance liquidity of the underlying asset
- Lower transaction costs
- The price discovery process
- Portfolio management
- Provides signals of market movement
- Facilitates financial market integration.
Exchange Traded Derivatives:
EID are those derivatives instruments that are traded via specialized derivatives exchange or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.
- The world’s largest derivatives exchanges ( by no. of transactions) are the Korea Exchange.
- There is a very visible & transparent market price for the derivatives.
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