A derivative is a financial contract whose value depends on another asset. This main asset is called the 'underlying asset.' Think of a derivative like cheese. The price of cheese depends on the price of milk. If milk becomes expensive, cheese prices usually go up. In finance, these underlying assets can be stocks, gold, oil, or even interest rates. Derivatives do not have their own value. They only get value from the asset they are linked to.
Concepts (3)
A Forward contract is a custom-made private agreement. It is risky because one party might back out. A Future contract is a standard deal traded on an exchange. The exchange guarantees the trade, so there is no risk of default.
A Forward contract is a custom-made private agreement. It is risky because one party might back out. A Future contract is a standard deal traded on an exchange. The exchange guarantees the trade, so there is no risk of default. For example, a private deal to buy 10kg of gold is a Forward. A standard contract for 1kg gold on the MCX exchange is a Future.
This is an agreement between two parties to exchange interest rate payments. One party might have a 'Fixed Rate' (does not change) while the other has a 'Floating Rate' (changes with market). They swap these to match their needs.
This is an agreement between two parties to exchange interest rate payments. One party might have a 'Fixed Rate' (does not change) while the other has a 'Floating Rate' (changes with market). They swap these to match their needs. For example, a bank expecting rates to rise might swap its floating rate for a fixed rate to keep costs stable.
A Call Option is the right to buy an asset at a set price. You use it when you think prices will go up. A Put Option is the right to sell at a set price. You use it when you think prices will fall.
A Call Option is the right to buy an asset at a set price. You use it when you think prices will go up. A Put Option is the right to sell at a set price. You use it when you think prices will fall. In both cases, the buyer pays a small fee called a 'premium' to get this right. Example: Paying 5 rupees today for the right to buy a stock at 100 rupees later.
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Start Lesson: Forward vs. Future