2/10/2017 How would you explain to a layman what a derivative instrument is?

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Daniel McLaury, Ph.D. Student in Mathematics at University of Illinois at
Chicago What is a derivative in layman's terms?
Written Sep 9, 2013
How can Communism be explained to a ten year old?
I'd give the example of a put option:
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"If you pay me \$5 right now, I'll agree to buy up to ten pounds of potatoes from you a month layman terms?

from now at a price of \$2/pound."
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It's called a "derivative" product because its value is derived from the value of the
underlying product -- in this case, potatoes.  If, in a month, potatoes are worth only \$1/lb, How can I explain limits (maths) to a layman?
you can buy ten pounds of potatoes for \$10, then sell them to me for \$20 and make a proﬁt
How can the Halting Problem be explained to a
of \$5 (because you made \$10 and paid me \$5 to start, ignoring the month's worth of interest layman?
on the \$5).  If, on the other hand, they're worth \$3/lb, then your contract will be worthless
since you wouldn't want to sell \$3/lb potatoes to me for only \$2/lb. How do explain transfer pricing to a layman?

How do I explain this equation to a layman?
Of course we can make more complicated derivatives, too, but it's the same basic idea -- a
product whose value is derived from the value of something else. How can I explain genetics to a layman?
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Anirudh Joshi, not all data is good data
Written Sep 9, 2013
All derivatives are insurance.

If something goes wrong with an asset whether that's a car, a house or a life, if you pay us X
amount today, we will pay you Y amount when something goes wrong.

The trick is in picking the right X and the right Y.

Amit Pawar
Written Sep 9, 2013
DERIVATIVES : In simple term the derivative means you predict and betting on future
weather this will happen or not on the bases of current situation and your own interest.

DERIVATIVES
Derivatives are securities whose value is derived from the underlying security.
Examples of security: Such as bonds, stocks, currencies, commodities, an index or
temperature.

Types of Derivatives.

Ø  Forward
Ø  Future
Ø  Options
Ø  Warrants

Necessity of Derivatives
Ø  Counterparty
Ø  Common Asset
Ø  Market
Ø  Contractual Agreement

Markets

Ø  CBOE-Chicago Board Options Exchange,
Ø  CBOT-Chicago Board of Trade, USA
Ø  LIFFE-London international ﬁnancial futures Exchanges (LIFFE).
Ø  BOX - Boston Options Exchange
Ø  EDX London - London's Equity Derivatives Exchange,  UK

Forward Contracts

Ø  Deﬁnition:-A forward contract is an agreement between two parties to buy or sell an asset
at a pre-agreed future point in time.

Ø The owner of a forward contract has the obligation to buy the underlying asset at a ﬁxed
date in the future for a ﬁxed price.
Ø  They are traded on, over the counter .

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as well as the location where delivery must be made.   Ø  In modern (ﬁnancial) markets. if the value of the house is \$ 1.00. etc. this speciﬁes which bonds can be delivered. (i. Ø  The last trading date.2/10/2017 How would you explain to a layman what a derivative instrument is? ­ Quora     Search for questions.\$1.000 on 1.04.2005. This can be the notional amount of bonds. making it easier for them to plan.e. Ø  The delivery month.1. the value of the house is \$1.         Types of Future Contracts There are many diﬀerent kinds of futures contract.00.000.1.1.   Ø  Example:- Ø  Commodities markets farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price. Similarly. usually by specifying: Ø  The underlying. In the case of bonds. the minimum permissible price ﬂuctuation. & deposited in bank.000. a ﬁxed number of barrels of oil. (spot price) layman terms?             “A” will gain \$6000 and “B” will loose \$ . Ø  The type of settlement.       Speciﬁcation on a Future Contract   Futures contracts ensure their liquidity by being highly standardized. Ø  Situation 2: On 1.2006. This can be anything from a barrel of sweet crude oil to a short term interest rate.10.2006. and exchange traded   Ø  Some futures contracts may call for physical delivery of the asset. and topics Sign In   Related Questions What is a derivative in layman's terms? Example of how the payoﬀ of a forward contract works   How can Communism be explained to a ten year old? Ø  “A” enters a forward contract to buys a house from “B” \$1. while most are settled in cash.1. Ø  The grade of the deliverable. For example. livestock producers often purchase futures to cover their feed costs. units of foreign currency. this speciﬁes not only the quality of the underlying goods but also the manner and location of delivery.000. if the value of the house is \$1.com/How­would­you­explain­to­a­layman­what­a­derivative­instrument­is 3/9 .2005. he would earn at least 4% p. How can I explain genetics to a layman? Ø  Hence it would be ideal for A & B to enter into a one year’s forward contract (expire date How do you explain 2G network to a layman? 1.2006) for at least \$1.   Ø  They are standardized. reﬂecting the many diﬀerent kinds of tradable assets of which they are derivatives.04. the NYMEX Light Sweet Crude Oil contract speciﬁes the acceptable sulfur content and API speciﬁc gravity.6. either cash settlement or physical settlement. the notional amount of the deposit over which the short term interest rate is traded.000       FUTURE CONTRACTS   Ø  Deﬁnition: Future contract is an obligation to buy or sell a speciﬁc quantity and quality of a commodity or security  at a certain price on a speciﬁed future date.000.1.04. Ø  Other details such as the commodity tick. (spot price) What is the cloud? Can it be explained in terms that a             “A” will loose \$ -4000 and “B” will gain \$4000 non­technical person can understand?   How can I explain limits (maths) to a layman?     How can the Halting Problem be explained to a Example of How Forward Prices Should Be Agreed Upon Considering the Time value layman?   Ø  On 1.1.quora. Ø  The amount and units of the underlying asset per contract.   Ø  Foreign exchange market   Ø  Bond market https://www. In the case of physical commodities.000) How do I explain this equation to a layman? Ø  If A takes a loan and buys the above house on 1.1. so that they can plan on a ﬁxed cost for feed. Ø  The currency in which the futures contract is quoted.2005 What is the meaning of torque and power in a car in Ø  Situation 1: On 1. Ø  Margin percentage are speciﬁed. people.2005 he will have to at least pay 4% interest to the bank.a. "producers" of interest rate swaps or equity derivative products will use ﬁnancial futures or equity index futures to reduce or remove the risk on the swap. How do explain transfer pricing to a layman? Ø  If B sold on 1.