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Derivatives Market For Beginners | Edelweiss Wealth Management - YouTube
Channel: Edelweiss Wealth Management
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derivatives a financial contract whose
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value is dependent on an underlying set
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of group of asset the commonly used
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assets are stocks bonds currencies
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commodities and market indices the value
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of the underlying asset keeps changing
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according to market condition the basic
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principle behind entering into
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derivative contracts is to earn profits
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by speculating on the value of the
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underlying asset in future let us
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understand this with a better example
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let's say a farmer who produces wheat
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expects to sell 10 quintals of wheat
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after four months after peas 2004
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quintile but he's afraid of some damage
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due to untimely rain predictions to
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avoid the risk he approaches a
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commodities broker and enters into a
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contract to sell 10 quintal of wheat
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production after four months at 2000
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therefore tomorrow if the prices fall to
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rupees 1970 due to large supply in the
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market the broker will be bound to pay
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rupees 2000 to the farmer but after four
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months if the market price of the wheat
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rises to rupees 2020 the farmer ends up
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losing rupees 20 per quintile as he is
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bound to sell at rupees 2000 the broker
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this transaction
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very simply explains how a derivative
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contract works it is an example of a
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forward contract where the underlying
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asset is a commodity different types of
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derivative contract the four major types
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of derivative contracts are forwards
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futures options and source let us take
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you through each of these types in
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detail forwards and futures these
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financial contracts obligate the buyer
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to purchase an asset at a pre agreed
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price
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on a specified future date both forward
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and futures are essentially the same in
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nature the major difference is that
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futures are traded on exchanges while
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forwards are customized contracts and
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they are not traded anywhere options
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options provide the buyer of the
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contracts the right but not the
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obligation to purchase or sell the
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underlying asset at a predetermined
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price there are two kinds of options
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call and put in a call option you have
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the right but not the obligation to buy
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a given quantity of underlying asset at
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a given price in a put option you have a
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right but not the obligation to sell a
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given quantity of the underlying
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commodity or asset at a given price to
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buy any kind of options you have to pay
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a premium swaps swaps a derivative
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contracts that allow the exchange of
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cash flows between two parties the most
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popular types of swaps are interest rate
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swaps commodity swaps and currency swaps
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there is a term which is vital here to
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be known that is mark-to-market
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mark-to-market involves recording the
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price or value of the security to
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reflect the current market value rather
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than the book value it is also known as
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m2m and is mostly done in future
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contracts now what are the benefits of
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derivative trading first of all hedging
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risk exposure since the value of the
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derivatives is linked to the value of
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the underlying asset the contracts are
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primarily used for hedging risk hedging
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risk means reducing risk in one's
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investment by making an other investment
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the investor takes opposite position in
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two investments to offset the risk of
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any adverse price movement
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number two underlying asset price
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determination spot derivatives are
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frequently used to determine the price
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of the underlying asset for example the
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spot prices of the futures can serve as
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an approximation of the commodity price
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number three higher returns derivative
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trading gives you more possibilities of
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higher interest but what are the risks
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that you should be aware of number one
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high volatility high volatility of
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derivative exposes them to potentially
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huge losses
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number two peculiar features derivatives
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of widely regarded as a tool of
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speculation due to the extremely risky
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nature of derivatives and their
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unpredictable behavior unreasonable
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speculation may lead to huge losses to
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confuse derivatives trading can be
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extremely beneficial but we suggest that
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you enter only after your head by two
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six years of experience in the stock
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market when done with enough experience
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and knowledge derivatives trading can
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certainly reap great benefits if you
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liked the video give it a thumbs up and
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subscribe to our channel for more
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insights visit our website
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