Derivatives Iminds by Iminds 9781921798634, 1921798637 instant download after payment.

Derivatives is a broad heading for a variety of financial instruments. These instruments possess the same basic structure. Essentially, they are contracts that derive value from their underlying asset. Through this contract, an investment is made in the future price performance of the asset. This is in contrast to investing in actual ownership of this asset. A simple example is a buyer makes an agreement with a seller to purchase planks of wood at a 5 dollars per plank in two weeks time. This agreement, rather than the actual sale of wood, is the derivative.  The two primary uses for derivatives are speculation and hedging against risk. An investor who is hedging may invest in a derivative that has an opposite market position to another investment in their portfolio. If the main investment incurs losses, these are offset by the derivative’s gains. Speculators, however, attempt to predict and profit from the price movement of the underlying asset. Derivatives have significant leverage. This means that even a small price change can result in significant gains. However, speculators also assume the risk of equally significant losses.  According to the specific conditions of the contract there are many types of derivatives. Depending on the asset, called the “underlier”, there are commodity derivatives, based on items such as crude oil or wood; and financial derivatives, based on financial instruments such as interest rates or currencies. The concept of commodity derivatives has existed in various forms for centuries. Financial derivatives, however, became more commonplace during the 1970s. This is partially due to the the end of the gold exchange standard and the floating of exchange rates in America, as well as increased volatility in interest rates at the time. There are four basic types of derivative contract, being options, forwards, futures and swaps. These are known as “vanilla” derivatives. Vanilla derivatives may be just one of these contract