Monday, July 23, 2012

Derivatives market and some commonly used derivatives

The market place where derivative contracts are traded is called derivative market.
They can be broadly classified as commodity derivatives and financial derivatives.

Commonly used derivatives are:

1. Forwards: agreement between two entities to buy or sell the underlying asset at a future date, at today's pre agreed price.

2. Futures: forwards contracts that are standardized and exchange traded.

3. Options: agreement in which buyer has option and right to buy/sell or not to buy/sell a certain agreed undeyling assets. two types of options are available;
  a. Call option: give the buyer the right but not the obligation to buy a given quantity of underlying asset at a given price on or before future date.
  b. Put Option: give the buyer the right but not the obligation to sell a given quantity of underlying asset at a given price on or before future date.

4. Warrants: longer dated options are called warrats having a maturity period of more than nine-months and usually taded in OTC market.

5. Swaps: they are private agreements between two parties to exchange cash flows in the future according to a per-arranged formula. Interest rate swaps and Curreny swaps are the commonly used swaps.

6. Baskets: options which are derived from a weighted average of a basket of assets. Equity index options are a form of basket options.

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