What are Derivatives and how they are useful?

Derivatives are financial products which does not have any valuable on their own but they derive their value from an underlying stock, security or any other asset. The underlying stock or security can tangiable or intangiable and furthermore can be present or not at the time of contract.

They provide parties an opportunity to hedge against risk in future due to fluctuations in the market. They help the parties to protect their profit irrespective of situation as the contract is binding.

For a lay man - Derivatives is what Cheese/Curd/Butter etc. is to Milk (Underlying). These have values derived from the underlying. As in the above case - as price of Milk varies there are chances of prices of other dairy  products to vary. Also, the prices of the dairy products are related in some way to milk prices but are different than milk prices due to some additional cost of processing/marketing etc.

 

Similarly, Financial derivatives have thier prices linked to the underlying. These are basically hedging instruments used to reduce exposure and risk to a particular market. But in today's world it is widely used for speculation as well. 

 

Derivatives either OTC or exchange traded amid other uses can be used for Hedging Foreign Currency/Commodity risk by corporates. 

 

 

 

Derivatives are a financial product which value is derived from an underlying product. The underlying product could be intangibles such as money or credit risk as well as tangibles such as commodities, gold or petroleum. They are useful as they allow a producer or a purchaser the opportunity to "hedge" or to protect their profitability by entering into a derivative contract of the correct underlying product. As financial and no financial products are subject to price risk, where they may change in value in a particular currency over time, a producer or purchaser could "lock in" their price over a significant length of time so that they are no longer subject to price risk. This is very important for Financial Managers.

 

Derivatives are also used by other parties as a pure speculative tool, in that they enter into such contracts with a view of making a profit. This is also a useful component of derivatives as they provide risk taking opportunity to a significant strata of the trading/investing group.

 

The existence of both hedgers and traders are important to ensure the continued existence of derivatives markets as this provides liquidity and therefore viability.

Derivatives are financial instruments like futures contract, forward contract, options, swap etc, which helps to minimize the risk of future price fluctuation of commodities, shares and other products.

Derivatives are fin instruments which derives value from the underlying, it can be either tailored or standardised.its uses are to hedge against fluctuations, to take leverage etc