Define what is meant by the term financial derivative and list the three classes of derivatives discussed in class. Provide an example of each type of derivative listed and discuss how the particular derivative works generally.
Financial derivatives means those instrument who derive their value from an underlying asset.
Three classes of derivatives are-
1. Futures contract-it is a contract in which both parties agree to buy and sell certain share at a certain specified date.it is standardized in nature
It could be exampled through buying index futures or selling index futures.
2. forward contract-it is a customised contract which is entered into the Forward Market to execute it on a particular date by two different party.
It could be in exampled through entering in a forward Hedge of securities in order to protect losses.
3. Options contract-these are the contract which provides with right to buy or sell some securities in the future. These contracts are also standardised in nature.
It could be exampled through buying or selling call or put option.
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