What Do You Mean By Derivatives? Give An Example.

Derivatives

A derivative is the contract between a buyer and a seller where the seller agrees to purchase the underlying securities at a specified price and time in the future.

Derivatives means investment that is used to trade price risk. It will buy/sell derivatives that increase or reduce the price risk on the stated securities. Derivatives market is mostly operated in electronic trading, OTC and brokerage markets.

Derivatives means the transaction where different types of securities of one company are traded. Most commonly, this is done through Exchange Traded Funds (ETF), Notes and Options. In derivatives, stocks are exchanged for different types of instruments like CDS (Credit Default Swaps), Equity indices, Commodities and Interest rates.

Why To Use Derivatives?

Derivatives market helps businesses to reduce their operational costs. The cost of derivatives is reduced by the lowest transaction costs. It also increases margins and promotes market efficiency. Derivatives market enables businesses to diversify their risk while maintaining the original value.

Here are the types of derivative:

1. Credit Derivatives
2. Interest Rate Derivatives
3. Commodity Derivatives
4. Currency Derivatives
5. Financial Derivatives
6. Asset Swap Derivatives
7. Foreign Exchange Derivatives