• Management of risk :Risk management is not about

the elimination of risk rather it is about the management of risk. Effective use of derivatives can save cost, and it can increase returns for the organisations. Efficiency in trading : Traders can use a position in one or more financial derivatives as a substitute for a position in the underlying instruments. Speculation : However, these instruments act as a powerful instrument for knowledgeable traders to expose themselves to calculated and well understood risks in search of a reward, that is, profit. Price discover: Another important application of derivatives is the price discovery which means revealing information about future cash market prices through the futures market

Application Of Financial Derivaties

Wheat. .Swaps. Silver. b) Financial derivatives: Forwards.Future.options.etc.Classification of Derivatives Consist of two categories: a) Commodities derivatives: Gold . 1) Futures: A Future is a contract to buy or sell a standard quantity and quality of an asset or security at a specified date and price.

• Forward Contracts : In a Forward Contract. The purchaser of an Option has rights (but not obligations) to buy or sell the asset during a given time for a specified price (the "Strike" price). The price paid for the security or asset may be agreed upon at the time the contract is entered into or may be determined at delivery. " . • Options : Options are traded on organized exchanges and OTC. An Option to buy is known as a "Call." and an Option to sell is called a "Put. • Forward Contracts generally are traded OTC. both the seller and the purchaser are obligated to trade a security or other asset at a specified date in the future.

Perhaps the best-known Swap occurs when two parties exchange interest payments based on an identical principal amount. and Party B holds a 10-year 100. they would have engaged in an interest rate Swap." • Think of an interest rate Swap as follows: Party A holds a 10-year 100.000 home equity loan that has an adjustable interest rate that will change over the "life" of the mortgage. If Party A and Party B were to exchange interest rate payments on their otherwise identical mortgages. .• Swaps: A Swap is a simultaneous buying and selling of the same security or obligation.000 home equity loan that has a fixed interest rate of 7 percent. called the "notional principal amount.

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