Derivatives

Q  What are Derivatives?
A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc.Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. The value of a derivative is based on the expected future price movements of their underlying asset. Derivatives are often used as an instrument to hedge risk for one party of a contract, while offering the potential for high returns for the other party. Derivatives have been created to lessen fluctuations in stock, bond, commodity, and index prices; changes in foreign exchange rates; changes in interest rates etc.
Q  What are Futures?
Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement
Q  What are Options?
An Option is a contract that grants its owner the right, but not the obligation, to make a transaction in an underlying commodity or security at a certain price within a set time in the future. The underlying commodity or security could be anything. Equity shares are one major type of underlying asset. The right to sell a security is called a ‘Put Option’, while the right to buy is called the ‘Call Option’. Just as futures contracts minimize risks for buyers by setting a pre-determined future price for an underlying asset, options contracts do the same however, without the obligation to buy that exists in a futures contract.
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