Due to its flexibility and multidimensionality, the marketderivatives offers the widest opportunities to reduce costs, insurance risks, but it can also cause a variety of crisis phenomena. It is in the uncontrollability of the growth in the volume of derivatives that lies in their threatening power. Despite such a dubious reputation, these financial instruments have been attracting interest for a long time. Derivatives - what's this? With what do they "eat"?
What does the word derivative mean?
In English, the derivative is"derivative". And what does this designation mean? Derivative is a derivative financial instrument. In other words, it is an obligation to put the underlying asset underlying the derivative up to a certain time. Also, the derivative is a financial instrument for futures deals, that is, agreements of several parties that previously determine their obligations and rights for the future with respect to underlying assets.
What is attributed to derivatives of the stock market?
Financial derivatives are, by definition, futures and forward contracts, over-the-counter and stock options, swap derivatives and swaps themselves.
What are the functions of derivatives?
A derivative is a security that performscertain functions. For example, an important property consists in hedging (insurance) the possibility of price changes in the future on intangible assets (which include stock indexes), on goods, on the cost of loans. This is the essence of derivatives of financial markets. If we talk about commodity hedging, then derivatives are irreplaceable regulatory instruments that allow commodity producers to hedge against possible future adverse changes in prices for their product.
Why exactly "derivative" tools?
For all the seeming complexity of derivatives, this issecurities with a fairly simple use. Derivatives are named because the formation of prices for derivatives depends on the change in the value of the underlying asset that underlies them. For example, if the price of gold changes, then the price of the derivative will also be different. That is why it is always necessary to say to which underlying asset is one or another derivative financial instrument.
What are the types of derivatives?
There are several main types of this financial instrument.
- Derivatives in the foreign exchange and stock markets, whichrepresent a contract for the purchase and sale of different currencies. An obligatory condition is execution after some time, which depends on the change in the rate of the currency being sold or bought, and in the case of the stock market there is a direct dependence on the underlying asset, such as equity. Such derivatives can also be classified into three main groups: forwards / futures, swaps and options. The former depend directly on the future price of the underlying assets. Swap contracts depend on the ratio of the price at the moment to the price in the future. Options - from changes in value, but slightly less so than futures and forwards. These groups, besides swaps, are called “basic urgent instruments”.
- Interest derivatives.This tool appeared due to periods of destabilization of interest short-term rates. The interest derivative is a tool to hedge risks, its use additionally affects the liquidity of the capital markets and the possibility of fixing certain rates of profit for companies in the future. The most widely used on the international market are interest swaps, options "flor" and "cap".
- Credit derivatives are over-the-counterstructured financial instruments that separate credit risks from assets in order to transfer them to the counterparty in the future. These derivative papers allow the beneficiary to transfer credit risks on the assets to the side of the guarantor without the necessary sale of the asset.
