DERIVATIVE MARKET

DERIVATIVE MARKET

The derivative market is the financial market for derivatives, financial instruments like futures contracts, options etc. which are derived from other forms of assets.

                        This market can be divided into two parts:-

1. Exchange traded derivatives(Future market)
2. Over the counter markets.

VARIOUS DERIVATIVES

• Options :- An option is a contract which gives the owner the right, but not the obligation, to buy or sell an underlying asset or instrument on or before a specified date. 

                       The buyers pays a premium to the seller for this right.

1. An option which conveys the right to buy something at a specified price is called a "call".
2. An option which conveys the right to sell something at a specified price is called a "put".

• Warrants :- A warrant is similer as option with maturity haing more then options.

                     Deeply , A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. They are traded "over the counter market".

• Swap :-  A swap is a derivative in which counter parties exchange cash flows of one,s party financial instrument for those of the other party,s financial instrument.

1. The benefit of swapped is depend on the type of instrument. for ex- In case of swaping bonds, the periodic interest or coupon payments associated with bonds may be benefit payment.
2. In swapping , mainly parties agree to exchange one stream of cash flows against another cash flows.  These streams are called as "legs of the swap".
3. The cash flows are calculated over a "national principal amount" which is usually not change as in options or future.
4. Swaps can be used to hedge certain risks such as "Interest rate risk". 
5. Interest rate swaps :- Swaps involve exchange of one stream of interest payments for another stream of interest payments.

                        for ex:- An organisation that has taken a loan at fixed interest rate may like to convert it to a floating rate loan.

• Future contracts :-   Please refer my previous posts to understand this.