derivaties - Derivative (finance) - Wikipedia, the free...

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Derivative (finance) From Wikipedia, the free encyclopedia A Derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying). Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. Derivatives can be used by investors to speculate and to make a profit if the value of the underlying moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level). Alternatively, traders can use derivatives to hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out. Derivatives are usually broadly categorised by: s The relationship between the underlying and the derivative (e.g. forward, option, swap) s The type of underlying (e.g. Equity derivatives, FX derivatives, credit derivatives) s The market in which they trade (e.g. exchange traded or over-the-counter) Finance Financial markets Bond market Stock (Equities) Market Foreign exchange market Derivatives market Commodity market Money market Spot (cash) Market OTC market Real Estate market Private equity Market participants Investors Speculators Institutional Investors Corporate finance Structured finance Capital budgeting Financial risk management Mergers and Acquisitions Accounting Financial Statements Auditing Credit rating agency Leveraged buyout Venture capital Personal finance Credit and Debt Employment contract Retirement Financial planning Public finance Contents s 1 Uses s 1.1 Hedging s 1.2 Speculation and arbitrage s 2 Types of derivatives s 2.1 OTC and exchange-traded s 2.2 Common derivative contract types s 2.3 Examples s 3 Cash flow s 4 Valuation s 4.1 Market and arbitrage-free prices s 4.2 Determining the market price s 4.3 Determining the arbitrage-free price s 5 Criticisms s 5.1 Possible large losses s 5.2 Counter-party risk s 5.3 Unsuitably high risk for small/inexperienced Page 1 of 10 Derivative (finance) - Wikipedia, the free encyclopedia 9/16/2009 http://en.wikipedia.org/wiki/Derivative_(finance)
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Uses Hedging A technique designed to eliminate or reduce risk. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be
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This note was uploaded on 07/29/2010 for the course ACCOUNTS 2332 taught by Professor Piyush during the Fall '10 term at Amity University.

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derivaties - Derivative (finance) - Wikipedia, the free...

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