? In the era of globalisation and liberalization, technology, capital and other resources atomic number 18 moving across content borders easily and increasing the volume of international trade. ? Due to the rapid changes in corporate, bank and investment finance in new-fashioned years a new set of financial instruments called derivatives earn come into being. ? The derivatives instruments are financial instruments whose value is based on the underlying assets or securities such as foreign convince, exchequer bills, bonds, shares and commodities. Definition ? A derivative is a financial instrument whose pay-offs is derived from some other asset which is called as an underlying asset. ? in that respect are a large number of simple derivatives standardized futures or forward contracts or swaps. Options are more intricate derivatives. ? Derivatives are tools to reduce a firms encounter exposure. Hedging is the term used for reducing risk by using derivatives.
Types of derivative instruments ? Derivative instruments are of two types: ? Those that are traded on the floor of the turn such as futures and options. ? Those that are traded over the counter (OTC), such as forwards, FRAs, options and swaps.
? The main departure between these two types of derivative instruments is in the counter companionship risk and liquidity. ? While the instruments traded on exchange do not carry counter party risk, OTC instruments do. ? In the exchange traded instruments one can exit at any clock time at the prevailing rate because they are quoted regularly on the exchange. OTC instruments, however, are not so liquid.
Forward contracts
? A forward contract is an agreement between two parties to exchange an asset for cash at a predetermined future date for a price that is specified today.
? In encase of a forward contract, both the emptor and the seller are bound by the contract while under an option, the buyer has a right to decide whether or not she would exercise...If you require to get a full essay, order it on our website: Orderessay
If you want to get a full essay, wisit our page: write my essay .
No comments:
Post a Comment