Derivativeswhat are the derivative financial instruments?


  • what are Derivatives

    Derivative financial instruments are contracts whose value depends on the performance of an “underlying asset”. Therefore, the derivative contract does not require owning the underlying asset but has the sole purpose of speculating on its performance.

    The underlying assets may be:

    • Shares
    • Bonds
    • Currency pairs
    • Indexes
    • Goods (eg coffee, cocoa, gold, oil, etc.).
    • Interest rates

    There are essentially three main motivations because of which a trader subscribes for derivatives:

    • Hedging: It is the protection of the value of a primary investment position from unwanted variations in market prices. The use of the derivative instrument helps neutralize the adverse market trend by balancing the losses/gains on the position to be hedged pertaining to gains/losses on the derivatives market.
    • Speculation: The speculation strategies are aimed at achieving a profit based on the expected evolution of the underlying asset price. This activity with derivatives today is getting more popular and is destined to become more important in the coming years.
    • Arbitrage: Arbitrage is a momentary misalignment between the price of the derivative and the underlying (intended to coincide with the expiration of the contract). The derivative is then exploited by selling the instrument overvalued and buying the undervalued asset and thus obtaining profit without risk.

     

    What we advise to look at is the speculative one, for anyone who is an independent trader, because it allows in a simple and inexpensive way the ability to invest in traditional assets.

    95% of derivatives are traded on over-the-counter (OTC) non-regulated markets.

    The primary derivatives are:

    • CFD
    • Features
    • Options
    • Swap
    • Forward

    If you want more details on each of them, you can read the related articles in the section INSTRUMENTS ->OTHERS DERIVATIVES

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    To trade using derivatives financial instruments, it is necessary that one enables a proper research, as the strategies differ from one market to another. Let’s suppose for instance that you wish to buy a stock that is likely to rise in future, in this case; you will need to conduct a buy transaction. However, in the derivative market, you would need to enter into a sell position, meaning the strategies change.

  • the Manager's answer

    Robert Danvil - Investment Manager

    Maintain your margin amount. It is important for you to arrange your margin amount which means one cannot withdraw the amount set from the active account until the trade is settled.  Also, ensure that one selects the stocks and their contracts by the amount they have in and not more than that.

  • the Mentor's answer

    Nicholas Kihn - Forex coach and mentor

    Basically, there are four types of derivatives contract that you can choose. They are forwards, futures, options, and swaps.

    While futures are the contracts which represent an agreement to buy or sell a set of assets at a given time in future or when the market hits the specific amount; forwards are the futures that are not standardized and are not traded on stock exchange. Options contracts are the contracts in which when you buy a contract, you are not obliged to hold the terms of the agreement.Swap is a contract between two parties where the cash exchange flow takes place on a determined date or in some situation on multiple dates.

Members Comments

  1. Profile photo gravatar of Granville Herzog
    Granville Herzog (thalia67)
    says:

    Somewhat less familiar are the markets for derivatives, which are financial instruments that derive their values from the underlying assets. Derivatives have become increasingly important effectively managing financial risk. Multi-National Corporation use derivatives as hedging strategy for their cash deposited overseas. All derivatives have an underlying and have a buyer and a seller. More importantly, derivatives have high degrees of leverage, not low degrees of leverage, meaning that participants in derivatives transactions usually invest only a small amount of their own money relative to the value of the underlying asset. So, small movements in the underlying can lead to fairly large movements in the amount of money made or lost on the derivative. Derivatives generally trade at lower transaction costs as compared to spot market, and sometimes, they are more liquid than their underlying assets. For example, a shareholder of a company can reduce or even completely eliminate the market exposure by trading a derivative on the equity.

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