Financial Derivatives - An Introduction - YouTube

Press the bell icon while subscribing to the Asset Yogi channel

So that you'll get the notification of the latest finance video

Namaskar, my name is Mukul and you are welcome to the Asset Yogi

In this video, we are going to discuss a very important and interesting topic

We will understand the basics of financial derivatives

You may have heard about the future and options

If you are interested in the stock market or you do trade or investment

Many times people invest in futures and options

But they bear huge losses because their basics aren't clear.

We will pay attention to the basics of financial derivatives in this series

In this video, I will try to cover what is financial derivatives

How many types of financial derivatives are there?

Music

See, sometimes financial derivatives or future or options

People get scared by these names

that it is a very complicated thing

And maybe you are trying to execute

it in your day to day life

And you don't know that you've executed any future

or option

This means I will give you an example

Let's say you have bought a property from someone And you've given an initial amount of let's say 50000 Rs

And the total value of the property is let's say 50 lakhs Rs

Maybe the property prices are rising rapidly

Let's say you have to give some amount after 1 month

Let's say 10%, 15%

Maybe within 3 days only, your broker says you to

take the profit of 50000 Rs in 3 days

Leave this deal

There is a new party who is ready to give more money

Then you may think that you are getting 50000 Rs within 3 days

It's not that bad to deal

Then maybe you will execute that deal

If you book the profit of 50000 Rs

That means you've executed an option

This is a call option.

Now see, you've executed an option

without even knowing

Then it is not that difficult we will take inspiration from our day to day lives

So let's try to understand the concept from the beginning.

What is the meaning of the derivative in the financial derivative?

First, we will understand the derivative. Derivative means anything whose value

is derived from another thing. It is very simple.

In financial derivatives, any contract whose underlying value is something

else. Its value is derived from some other asset.

I will explain this with the help of an example

I will talk to you about the most simple financial derivative

So the most simple financial derivative is the share

From where the value of a share is derived

If we see it

Then the value of one share is derived from the value of the company

Then if say the share is the simplest form of derivatives

There can be other types of underlying assets

What other type can be there?

Shares can also be underlying assets

Futures, options, swaps come above shares

How many types of financial derivatives are there?

All these forwards, futures, options, and swaps

There are four types of financial derivatives

For what type of underlying assets can they be made?

Interest rates. I will talk about interest rates with you

So you can understand with this example

There are shares, bonds, property that can also be an underlying asset

Commodities, currencies, and market index

Now I will give you an example of an interest rate

You may have heard about the fixed-rate and floating interest rate

If you haven't then you can watch my video.

See the interest rate keeps fluctuating

For example, if we talk about home loan interest rate

in 2008, then the interest rate was approximately 8%

This can be more or less.

I am just taking this as an illustration

Let's say within 4 years these interest rates increased rapidly

The interest rate of home loans went up to 11%

It came back to 8 % in 2017

And again there is an upward trend

In 2019, let's say we are at the end of 2018

We will consider our interest rate of home loans in 2019 is 8.5%

Now the bank gives you an option that

Either you take the floating interest of 8.5%

I will write floating here.

Or get your interest fixed as 9%

for 3 years

Let's say, you have fixed the interest of 9%

What happened here is that

You have minimized your risk

Maybe the interest rates

We will do it with another color

Maybe it will rise to 11% in 2022

If this gets 11% then this difference is your profit

You are benefited by this

What you did was that you hedged your risk

Why do we execute financial derivatives

Because we want to minimize our risk

Minimize the risk means we are hedging the risk

What is the other reason for executing the financial derivative

Speculation

Assume the third party comes and say that

Let's say the bank is not giving you the 9% interest rates

Then I will give you a 9% interest rate

Whatever will be the difference

Assume if there is a benefit

Whatever company is providing you 9%, it says

They think that the interest rates will fall in the future

Then they will earn profit

If that becomes the interest of 7.5 % in the next 3 years

Then they will get a profit of 1.5 %

But if it becomes 11% then

They will face loss

They are taking a risk. The meaning of taking a risk is

The person who is taking risk is speculation

And the one who minimizes the risk is hedging

So it depends on who is executing the financial derivative. So these are the basics of

financial derivatives. So we talked about hedging and speculation being executed

for financial derivatives. We talked about underlying assets

that on what assets these financial derivatives are executed.

There are four types of financial derivatives. We will cover them one by one in separate videos

So please watch the whole series. If you liked this video then like and share the video.

If you have any suggestions related to the video or the channel then comment below.

And please tell us your experience that how much experience do you have in

financial derivatives

How you have executed the trades

Or contracts whether they are future or options

So if you haven't subscribed to the channel yet then subscribe

And press the bell icon so that you'll get the notification of the latest video

Let's meet in the next informative video

Till then keep learning, keep earning

And be happy