Notes On Derivatives Products And Markets Essay

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CHAPTER 1: INTRODUCTION 1.1 Profile of the derivatives products and markets Derivative is an instrument whose value is derived from the value of one/more underlying financial asset. It can be bonds, stocks, indices etc. Common examples of derivative instruments are futures and options. They play an important role in managing risk of uncertainty in holding a financial assets as well as enables price discovery of the asset. Derivatives market has been a very important and a powerful influencer in the working of the financial markets across the globe. This is mainly due to the widening of the scope of derivatives by the introduction of new derivative products in different markets of the world. The importance and the role of derivatives in the financial world can be emphasised in its sheer volume and worth of the derivatives market in the world. By analyst estimates it exceeds $1.2 quadrillion i.e., close to 10 times the GDP of the world economies. 1.1.1 Basic derivative instruments A derivative market basically consists of 4 types of derivative instruments namely: Forwards, Futures, Options and Swaps. A brief description about the usage and characteristics of these derivative instruments are explained below.  FORWARDS: A forwards are customizable contract between two parties agreeing to buy or sell an asset of some value in terms of money at a pre- determined price and at a specified date. Forwards are known as OTC (Over- the- counter) products. This basically means that,

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