Finance

Derivatives Markets

Derivatives

Derivatives are a series of contracts between two parties in which there are specific conditions such as dates, amounts, and variables. Throughout these contracts the individuals from either party will have a payment or payoff due at that date specified. They try to act as a ownership within the benchmark of the markets of forwards and futures. Specifically derivatives markets can have many functions. These include Risk management, price discovery, market efficiency, operational advantages, and financial engineering. Risk management and financial engineering show a diversified portfolio. Price discovery shows a forecasting in prices for options and futures from CBOE also known as Chicago Board Options Exchange. Operational advantages are future contracts that can get individuals towards the ease of short selling and market efficiencies will low transactional cost for arbitrage. Some types of contracts of derivatives include futures, forwards, swaps and options. Futures consist of an agreement between two parties that will buy or sell an asset at a particular time and date. By contrast a forwards trade over the counter. With forwards no dealer actually meet in person, instead they meet throughout phones and networks for exchanges. Both futures and forwards can be previewed or estimated using a payoff graph. Options are not necessarily an obligation when it comes to a call/put. This primarily means to buy or sell an asset at a certain time, price and date. Options also work with the payoff graph but use a premium fixed cost. Here the individual is asked to pay a fee every so often to make sure they are able to pay the dealer the full amount of the contract. The major difference between options and forwards/futures is that for options they have the choice to buy or sell. On the other hand futures and forwards have an obligation for buying and selling. Finally Swaps is an agreement between two parties that exchange with a series of...