Derivative
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Financial Management
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ASSIGNMENT ON DERIVATIVES
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Presentation on Derivatives
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DERIVATIVES
Definition: A derivative is a complicated financial contract that gets (derives) its value from an underlying asset. It is an agreement between a buyer and a seller that says how much the price of the asset will change over a specific period of time.
The underlying asset can be a commodity, such as oil, gasoline or gold. Many derivatives are based on stocks or bonds. Others use currencies, especially the U.S. dollar, as their underlying asset. Still others use interest rates, such as the yield on the 10-year Treasury note, as their base. These assets can be, but do not have to be, owned by either party to the agreement. This makes derivatives much easier to trade than the asset itself.
Derivatives Trading
It's estimated that derivatives trading is now worth $600 trillion -- ten times more than the total economic output of the entire world. In fact, 92% of the world's 500 largest companies use them to lower risk. For example, a futures contract can promise delivery of raw materials at an agreed-upon price. This way the company is protected if prices rise. They can also write contracts to protect themselves from changes in exchange rates and interest rates. (Source: NYT, Bank Face New Checks on Derivative Trading, January 3, 2013)
In this way, derivatives make future cash flows more predictable. Companies can then forecast their earnings more accurately, boosting stock prices.
Financial Management
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ASSIGNMENT ON DERIVATIVES
-------------------------------------------------
-------------------------------------------------
Presentation on Derivatives
-------------------------------------------------
-------------------------------------------------
DERIVATIVES
Definition: A derivative is a complicated financial contract that gets (derives) its value from an underlying asset. It is an agreement between a buyer and a seller that says how much the price of the asset will change over a specific period of time.
The underlying asset can be a commodity, such as oil, gasoline or gold. Many derivatives are based on stocks or bonds. Others use currencies, especially the U.S. dollar, as their underlying asset. Still others use interest rates, such as the yield on the 10-year Treasury note, as their base. These assets can be, but do not have to be, owned by either party to the agreement. This makes derivatives much easier to trade than the asset itself.
Derivatives Trading
It's estimated that derivatives trading is now worth $600 trillion -- ten times more than the total economic output of the entire world. In fact, 92% of the world's 500 largest companies use them to lower risk. For example, a futures contract can promise delivery of raw materials at an agreed-upon price. This way the company is protected if prices rise. They can also write contracts to protect themselves from changes in exchange rates and interest rates. (Source: NYT, Bank Face New Checks on Derivative Trading, January 3, 2013)
In this way, derivatives make future cash flows more predictable. Companies can then forecast their earnings more accurately, boosting stock prices.