Accessing the Different Types of Derivatives Paper

Abstract

In this paper,‭ ‬eight derivatives‭ ‬are being discussed towards their‭ ‬usage,‭ ‬advantages,‭ ‬and disadvantages are being discussed.‭ ‬The advantages of‭ ‬forward contacts‭ ‬including the disadvantages were that the current or today price is what the purchaser pays no matter what,‭ ‬and offering a complete hedge,‭ ‬it requires tying up capital,‭ ‬and it is difficult to find a counter-party with no liquidity.‭ ‬Future contracts‭ ‬are formed on‭ ‬a developed market,‭ ‬have the‭ ‬same risk as other investments,‭ ‬and requiring the investor to have‭ ‬a lot of cash flow.‭ ‬Spot contracts are‭ ‬simple,‭ ‬the trader does not have to execute a trade,‭ ‬and‭ ‬additional protection is needed.‭ ‬ Advantages and disadvantages of call options are that traders are provided with a large amount of leverage,‭ ‬call options allow trader‭ ‬is to hedge their long positions,‭ ‬and etc.‭ ‬Hedging involves‭ ‬the individual or institutional‭ ‬benefit of holding the asset while reducing the risk that he future selling price,‭ ‬huge gains in millions are a potential reward,‭ ‬and,‭ ‬etc.‭ ‬ Some of the advantages and disadvantages to swaps are that they are‭ ‬flexible by allowing an individual to tailor the payment frequency,‭ ‬no upfront premium,‭ ‬allowing an individual to manage interest rate risk without affecting the financing arrangement,‭ ‬users to interest rate risk and credit risk,‭ ‬and‭ ‬global markets assist in bringing two parties that have an advantage in different markets together.‭ ‬When used properly,‭ ‬derivatives‭ ‬can help the‭ ‬buyer‭ ‬make a great profit,‭ ‬or lose money if they are not used properly.

Keywords:‭ ‬hedges,‭ ‬forward contracts,‭ ‬future contracts,‭ ‬spot contracts,‭ ‬call options,‭ ‬interest rate swaps,‭ ‬currency swaps,‭ ‬credit swaps.

Activity‭ ‬6:‭ ‬Accessing the Different Types of Derivatives Paper

‭ ‬Derivatives are financial instruments which value depends on underlying variables.‭ ‬Examples of derivatives are options,‭...