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By Neha
Sharma
YouTube Channel
bbambaconcepts by Neha Sharma

LETS DISCUSS ONE EXAMPLE

Baker

Sugar Factory
Owner

55

55

Expected Price after 60

2 months

45

Enter into contract

50

50

Actual Price after 2

months

52

52

Profit / Loss

+2

-2

Sugar Price Today

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WHAT IS DERIVATIVES?
A derivative is a financial product which derives their
value from underlying assets. The assets can be in
physical form. The assets range from agricultural
commodities including wheat, live cattle, precious
metals like gold, silver to foreign currencies, and from
interest rates to individual stocks.
These assets which can be bought or sold with the
derivatives are known as underlying assets

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CONTINUE
Hence derivatives are nothing but a contract which
is written between two parties for the trading of
marketable assets and its value is derived from the
value of these underlying assets.

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PROCESS
When a person invests in derivative, he bets that
the value derived from the underlying asset will
increase or decrease by a certain amount within a
fixed time period and make the contract with other
party.
There are many types of derivatives regularly
traded in market like futures, forwards, options,
swaps, weather derivative etc.

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CONTINUE
These instruments are used as a tool to reduce risk
for one party and also provide high return to
another, therefore derivative becomes most popular
financial instrument and traded in both commodity
as well as in stock market.

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STRUCTURE OF DERIVATIVE
MARKET
Derivative markets are financial market for derivative.
The market can be divided on the basis of
Underlying assets
Trading mechanism.

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CONTINUE
If the underlying assets of the derivative contract is coffee,
wheat, cotton, gold then it is called commodity
derivative market. But if the underlying assets are debt
instrument, currency, share price index, equity share etc.
then it is called financial derivative market.
The derivative market can be divided into
Exchange Traded markets
Over-the counter (OTC) markets.

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GROWTH OF DERIVATIVE MARKET

This rapid growth, development and widespread use of
derivatives contribute to the development of a more efficient
financial market. The following are some driving force behind
the growth of financial derivatives
To improve liquidity of the financial market.
To increase capacity of financial system to bear and price risk.
To increase the integration of national financial market with
the international markets.

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 For the development of more risk management tool.

Marked improvement in communication facilities
and sharp decline in their cost.
Reduced transaction cost.
These factors are responsible for the growth of financial
derivative in financial market.

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FEATURES
This new instrument attracted the investors in large amount
because of its following features: It is a physical asset, so we can settle the transaction in one
derivative by offsetting the transaction in the same derivative.
Mainly it is used for hedging purpose i.e. help in transferring risk
from risk adverse people to risk oriented people.
There is no limit on number of units transacted in derivative
market.

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CONTINUE
It provides liquidity to the market.
It helps in the discovery of current as well as
future price of the stock.
It is a secondary market instrument.
It increases savings and investment in the
long run.

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