Friends
Hope you are all enjoying your SIP.
Let me share with you ABC of Derivatives.
Well... this is an attempt to answer the first question..What are Derivatives? In finance, derivatives is the collective name used for a broad class of financial instruments. These instruments provide payoffs that depend on the value of other assets such as commodity prices, bonds and stock prices or market index values. Their values derive from the values of other assets. Company stock options, for instance allow employees to profit from changes in the company's stock price without owning shares.
Derivatives come in two basic categories, option type contracts and forward type contracts. These may be listed on the exchange or they may be privately traded.
Options buyers get a right to buy or sell an asset over a specific period.There is no obligation to buy or sell the asset. For getting this right the buyer has to pay a price (premium) to the seller of the contract.
Forward type contracts, which includes forwards, futures and swaps commit the buyer and seller to trade a given asset at a set price on a future date. These contracts involve price fixing on the current date.
The important point to note here is that in options contract there is an option to buy or sell however in the forward types contract there is a commitment.
Waiting for you to shoot further questions.
Happy learning
Shelly Nayyar
Happy learning
Shelly Nayyar
Thanks Shelly...that's really helpful..
ReplyDeleteHowever I want to ask as how one can judge when he needs to buy an option and go for it?
As we know that option gives you an right but not an obligation to buy/sell..thn under what condition one needs to exercise that?
Thank you for the question Neha..I have answered it in my next post" Discussion on Derivatives"..Hope it helps..
ReplyDeleteCheers
Shelly Nayyar