project report on derivatives
CHAPTER 1
INTRODUCTION
Derivatives Securities
A derivative security is a security whose value depends on the value of together more basic underlying variable. These are also known as contingent claims. Derivatives securities have been very successful in innovation in capital markets.
The emergence of the market for derivative products most notably forwards, futures and options can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are market by a very high degree of volatility. Though the use of derivative products, it is possible to partially or fully transfer price risks by locking – in asset prices. As instrument of risk management these generally don’t influence the fluctuations in the underlying asset prices.
However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash-flow situation of risk-averse investor.
Derivatives are risk management instruments which derives their value from an underlying asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds, Interest, etc.
Origin of Derivatives
While trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers’ need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first “futures” contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The farmers were afraid of rice prices falling in the future at the time of harvesting. To lock in a price (that is, to sell the
INTRODUCTION
Derivatives Securities
A derivative security is a security whose value depends on the value of together more basic underlying variable. These are also known as contingent claims. Derivatives securities have been very successful in innovation in capital markets.
The emergence of the market for derivative products most notably forwards, futures and options can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are market by a very high degree of volatility. Though the use of derivative products, it is possible to partially or fully transfer price risks by locking – in asset prices. As instrument of risk management these generally don’t influence the fluctuations in the underlying asset prices.
However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash-flow situation of risk-averse investor.
Derivatives are risk management instruments which derives their value from an underlying asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds, Interest, etc.
Origin of Derivatives
While trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers’ need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first “futures” contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The farmers were afraid of rice prices falling in the future at the time of harvesting. To lock in a price (that is, to sell the