What Is Derivatives?


0

It may sound like a house of cards, but many financial instruments in the global economy are based on nothing more than the value of other financial instruments. This scares many investors, and derivatives are often blamed for many of the excesses in the world economy. In fact, derivatives are not necessarily any riskier than any other investment in the global marketplace-they just have to be properly understood.

A derivatives, as its name implies, “derives” its value from another item of value. A financial future, for example, is an agreement to buy financial instrument, such as a stock price then goes up- or if interest rates move dramatically, affecting the prices of the underlying bonds- a financial future can skyrocket or plummet precipitously.

Many investors primarily those looking for a quick profit without carefully analysing the risks involved, have been burned by the explosion of derivative trading on the international markets. California’s Orange County, for example, became insolvent during 1990s after investing heavily in interest rate –linked precipitously.

Some derivatives can actually allow investors to avoid risk, giving them the possibility to “hedge” otherwise risky position. A retired homeowner, for example, may use an investment in interest-rate derivatives to counterbalance the effect of inflation on the value of the home.


Like it? Share with your friends!

0

What's Your Reaction?

hate hate
0
hate
confused confused
0
confused
fail fail
0
fail
fun fun
0
fun
geeky geeky
0
geeky
love love
0
love
lol lol
0
lol
omg omg
0
omg
win win
0
win
asiaafricabiz

0 Comments

Your email address will not be published. Required fields are marked *

Choose A Format
Personality quiz
Series of questions that intends to reveal something about the personality
Trivia quiz
Series of questions with right and wrong answers that intends to check knowledge
Poll
Voting to make decisions or determine opinions
Story
Formatted Text with Embeds and Visuals
List
The Classic Internet Listicles
Countdown
The Classic Internet Countdowns
Open List
Submit your own item and vote up for the best submission
Ranked List
Upvote or downvote to decide the best list item
Meme
Upload your own images to make custom memes
Video
Youtube, Vimeo or Vine Embeds
Audio
Soundcloud or Mixcloud Embeds
Image
Photo or GIF
Gif
GIF format