Derivatives: Options, Futures, Others

An Easy Derivatives Tutorial

this site Web
Home 500DollarPayday.Loan Site Policy Investment Stock Investing Technical Analysis Financial Statements Real Estate Mortgages Pension Planning Debt Solutions FOREX Trading
Financial Derivatives
  Introduction   Options   Futures   CFDs Tax Efficiency Financial Advisors Personal Finance Articles Software & Books Site Map Resources on the Web

page 1 of 4 | page 2

Derivatives Definition

A derivative is a financial instrument derived from an underlying asset, eg a stock, stock index, currency etc. Derivatives allow holders to speculate on price movements of the underlying asset without actually owning the asset concerned.

Derivatives are traded for two main reasons:

1) to allow holders to hedge a position, ie to reduce the risk inherent in their basic position;

2) to allow speculators to profit from correctly anticipating price movements.

Speculator profits essentially come from the premium paid by hedgers for reducing their risks.

Derivatives bookDerivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options by Andrew M. Chisholm. A step-by-step guide to derivative products. By distilling the complex mathematics and theory that underlie the subject, Chisholm explains derivative products in straightforward terms, focusing on applications and intuitive explanations wherever possible. Case studies and examples of how the products are used to solve real-world problems, as well as an extensive glossary and material on the latest derivative products make this book a must have for anyone working with derivative products.

Derivatives are usually highly geared, with a small percentage change in the price of the underlying asset producing a much larger change in the derivative price. This gearing is further increased traders trading on margin, ie depositing only a fraction of the value traded (the margin) with their broker. It follows that derivatives offer a much higher potential for profit - and also loss - than direct investments.

The main types of derivatives are:

  • Options - the right to buy/sell an asset at a particular price some time in the future.
  • Futures - the oblgation to buy/sell an asset at a particular price some time in the future.
  • SWAPS - two parties agree to swap financial arrangements with each other to mutual benefit, eg an institution with a fixed interest debt that believes interest rates will fall would swap its arrangement with another institution with variable interest rate debt that believes rates will rise.

Derivatives bookAll About Derivatives by Michael Durbin. Financial derivatives, from standard put and call options to more complex strategies and combinations, are among the most versatile, powerful, and valuable tools available to investors. All About Derivatives introduces you to the many different types of derivatives, providing simple explanations and easy-to-follow methods for using each. This straightforward, up-to-date examination covers all aspects of derivative contracts, explains techniques for pricing and trading them, shows how to use each to hedge risk or increase profits, and more. Avoiding complicated formulas and theories to focus on the information you need, it shows anyone--from individual investors to corporate risk managers--how derivatives work, how they fit into the larger world of investing, and why they can be the ideal trading vehicle for improving the financial performance of yourself or your organization.