What is a derivative?
Most derivative financial instruments are not under the Federal Law "On the Securities Market", the exception being the issuer's option. However, there are often so-called derivative securities such as options, forwards, futures, swaps, etc.
Derivatives are very important for risk management because they allow us to separate and limit risks. They are used to transfer elements of risk and, in this way, they can serve as a certain form of insurance. The likelihood of loss entails for the parties to a contract the need to identify all the risks involved before the contract is signed.
One of the main advantages of derivatives is . For example, an investor can hedge his portfolio against potential losses by purchasing a put option that will protect him from a possible decline in stock prices. In the event that the stock price does fall, the value of the option will increase, allowing the investor to recoup losses on the stock.
Derivatives are also used , that is, to profit from asset price fluctuations. For example, a trader can buy gold futures if he believes that the price of gold will rise in the near future. If the forecast turns out to be correct, the trader will make a profit.
In general, derivatives provide and enable investors to access new markets and assets. However, since derivatives involve a high level of risk, investors should be careful and understand their risks well before investing in these instruments.
To purchase a derivative financial instrument is necessary, unlike its basic instrument, so often the number of such securities available in the market does not coincide with the real number of the basic.
The classification of derivative financial instruments is based on two main features.
Derivatives are financial instruments with several characteristics. One of them is: the date of transaction and the date of settlement can be separated in time, so they are traded on the futures market of the exchange.
Another attribute of a derivative is , which can be a security, inflation rate, biological or chemical environmental indicators. Moreover, an asset can even be several objects at once.
To better understand how a derivative works, we can use an example from history described by Aristotle. Thales, the ancient Greek philosopher, assumed that the following year there would be a high harvest of olives. Based on this idea, he made a contract with the owners of the presses to rent equipment for the following season and paid a deposit. Under the contract, Thales had the right to use the asset, the olive press, but was not obligated to do so. In the event of a poor harvest, he would only lose the deposit. However, his prediction came true, and Thales made money, as he rented out the presses at the market price, which increased significantly due to the rush in demand.
To determine whether a transaction is a derivative, three conditions must be taken into account:
An important point in derivatives trading is their time lag. Over a long period of time, events may occur that cannot be predicted in advance, so .