Facts You Must Know about Derivative
Are you looking to get some useful information about derivative as a beginner?
If yes you will find this article interesting and informative. Derivatives can
be defines as a security that has an underlying asset as its base.
They are also referred to contracts.
This is because they have to depend on the agreement between
parties and have to also comply
with specific terms that are relative to the derivative.
Main Types Of Derivatives
There are two main categories of derivatives and they are forward commitments
and contingent claims.
The example for the former is futures while it is options for the latter.
The value of derivatives is interlinked to the price fluctuations of the
asset in question and which forms part of the contract.
They are used basically for hedging established positions
and also for reducing exposure caused by fluctuations in price.
Many use them as a pure speculation option.
Understanding Future Contracts
Futures contracts are forward commitments and they are contract between seller
They contract to exchange a standardized asset at a specific time for
a particular price keeping the future in mind.
These future contracts are mostly created for assets that are
standardized and include currencies,
government bonds and commodities.
Forward Contracts – What Are They?
The OTC or over-the-counter versions of futures contracts are referred
to as forward contracts.
They are not traded on any exchanges. The terms are decided by
the parties to the agreement.
They also involve interest rate swaps between the parties concerned.
These could include companies and banks.
The parties get into the terms of the contract
and they are not standardized.
The parties are at liberty to customize the agreement in any manner
they would like to.
The floating rates of such contracts are often linked to LIBOR
(London Interbank Offered Rate)
for six, three or one month.
What Are Option Contracts
Option contracts are referred to as contingent claim contract derivative.
This offers the buyer the right (without obligation) to sell or buy an underlying
asset at a specific price and date.
It has call and put option.
Call is about buying the underlying asset while
put is about selling the same.
Getting to Know Mortgage-Based Securities
MBS or mortgage backed securities are just another form of derivatives.
It is used for making payments to investors from the proceeds of a large
group of home mortgage borrowers.
It comprises of loans from many home buyers.
These loans are grouped together and are sold as shares to investors.
Where To Look For Information
You can get information about any type of derivative from Investing.com.
It provides the right insight and knowledge-gathering option
for beginners in particular.
Written By : YOUSSEF J A ALMEER
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