Derivatives have become very important in the field finance. They are very important financial instruments for risk management as they allow risks to be separated and traded. Derivatives are used to shift risk and act as a form of insurance. This shift of risk means that each party involved in the contract should be able to identify all the risks involved before the contract is agreed. It is also important to remember that derivatives are derived from an underlying asset. This means that risks in trading derivatives may change depending on what happens to the underlying asset.
A derivative is a product whose value is derived from the value of an underlying asset, index or reference rate. The underlying asset can be equity, forex, commodity or any other asset. For example, if the settlement price of a derivative is based on the stock price of a stock for e.g. Infosys, which frequently changes on a daily basis, then the derivative risks are also changing on a daily basis. This means that derivative risks and positions must be monitored constantly.
The purpose of this Learning Centre is to introduce the basic concepts and principles of derivatives.
We will try and understand
- What are derivatives?
- Why have derivatives at all?
- How are derivatives traded and used?
In subsequent lessons we will try and understand how exactly will an underlying asset effect the movement of a derivative instrument and how is it traded and how one can profit from these instruments.
For Stock advice : Saturday watch on Market Outlook
