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    Traders in Derivatives Market There Are 3 Types of Traders in Derivatives Market

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    Derivatives are contracts whose price is dependent on an underlying asset such as a security, commodity, currency, interest rate or market index. There are several types of derivatives including futures, forwards, options, and swaps. Traders in the derivatives market fall into three categories: hedgers who seek to reduce risk, speculators who try to earn profits from anticipated price movements, and arbitrageurs who exploit temporary price differences between markets. Derivatives can be traded over-the-counter between two parties or on a derivatives exchange, and include various contracts based on their nature and market mechanism.

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    Traders in Derivatives Market There Are 3 Types of Traders in Derivatives Market

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    avinish
    29 views4 pages
    Derivatives are contracts whose price is dependent on an underlying asset such as a security, commodity, currency, interest rate or market index. There are several types of derivatives including futures, forwards, options, and swaps. Traders in the derivatives market fall into three categories: hedgers who seek to reduce risk, speculators who try to earn profits from anticipated price movements, and arbitrageurs who exploit temporary price differences between markets. Derivatives can be traded over-the-counter between two parties or on a derivatives exchange, and include various contracts based on their nature and market mechanism.

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    Derivatives are contracts whose price is dependent on an underlying asset such as a security, commodity, currency, interest rate or market index. There are several types of derivatives including futures, forwards, options, and swaps. Traders in the derivatives market fall into three categories: hedgers who seek to reduce risk, speculators who try to earn profits from anticipated price movements, and arbitrageurs who exploit temporary price differences between markets. Derivatives can be traded over-the-counter between two parties or on a derivatives exchange, and include various contracts based on their nature and market mechanism.

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    29 views4 pages

    Traders in Derivatives Market There Are 3 Types of Traders in Derivatives Market

    Uploaded by

    avinish
    Derivatives are contracts whose price is dependent on an underlying asset such as a security, commodity, currency, interest rate or market index. There are several types of derivatives including futures, forwards, options, and swaps. Traders in the derivatives market fall into three categories: hedgers who seek to reduce risk, speculators who try to earn profits from anticipated price movements, and arbitrageurs who exploit temporary price differences between markets. Derivatives can be traded over-the-counter between two parties or on a derivatives exchange, and include various contracts based on their nature and market mechanism.

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    of 4

    Derivatives

    The term Derivative stands for a contract whose price is derived from or is
    dependent upon an underlying asset.
    The underlying asset could be a financial asset such as currency, stock and market
    index, an interest bearing security or a physical commodity.
    Today, around the world, derivative contracts are traded on electricity, weather,
    temperature and even volatility.
    According to the Securities Contract Regulation Act, (1956) the term derivative
    includes:
    a security derived from a debt instrument, share, loan, whether secured or
    unsecured, risk instrument or contract for differences or any other form of
    security
    a contract which derives its value from the prices, or index of prices, of
    underlying securities.
    FEATURES
    Have a maturity or expiration date after which they become worthless or
    actually terminate.
    Value of the derivative can move exponentially relative to the value of its
    underlying.
    Types- future or forward contracts, options and swaps.
    Transactions take place in future specific date.
    TRADERS IN DERIVATIVES MARKET
    There are 3 types of traders in derivatives market:1) HEDGER
    A hedger is someone who faces risk associated with price movement of an asset
    and who uses derivatives as means of reducing risk. They provide economic balance
    to the market.
    Or
    These are investors with a present or anticipated exposure to the underlying asset
    which is subject to price risks. Hedgers use the derivatives markets primarily for
    price risk management of assets and portfolios.

    2) SPECULATOR
    A trader who enters the futures market for pursuit of profits, accepting risk in the
    endeavor. They provide liquidity and depth to the market.
    Or
    These are individuals who take a view on the future direction of the markets. They
    take a view whether prices would rise or fall in future and accordingly buy or sell
    futures and options to try and make a profit from the future price movements of the
    underlying asset.
    3) ARBITRAGEUR
    A person who simultaneously enters into transactions in two or more markets to
    take advantage of the discrepancies between prices in these markets.

    Arbitrageurs also help to make markets liquid, ensure accurate and uniform
    pricing, and enhance price stability.

    They help in bringing about price uniformity and discovery.


    or

    They take positions in financial markets to earn riskless profits. The


    arbitrageurs take short and long positions in the same or different contracts
    at the same time to create a position which can generate a riskless profit.

    Classification of derivatives contract1) On the basis of nature of contracta) Forward Contracts


    b) Future Contracts
    c) Options Contracts
    d) Swaps
    a) Forward Contracts
    A forward contract is an agreement between two parties a buyer and a seller to
    purchase or sell something at a later date at a price agreed upon today. Any type

    of contractual agreement that calls for the future purchase of a good or service
    at a price agreed upon today and without the right of cancellation is a forward
    contract.

    b) Future Contracts
    A futures contract is an agreement between two parties to buy or sell
    an asset at a certain time in the future at a certain price. Futures
    contracts are special types of forward contracts in the sense that the
    former are standardized exchange-traded contracts.
    c) Options Contracts
    Options are of two types calls and puts.

    Calls give the buyer the right but not the obligation to buy a given
    quantity of the underlying asset, at a given price on or before a
    given future date.

    Puts give the buyer the right, but not the obligation to sell a given
    quantity of the underlying asset at a given price on or before a given
    future date.

    d) Swaps
    Swaps are private agreements between two parties to exchange cash
    flows in the future according to a prearranged formula. They can be
    regarded as portfolios of forward contracts. The two commonly used
    swaps are interest rate swaps and currency swaps.

    Interest rate swaps: These involve swapping only the interest


    related cash flows between the parties in the same currency.

    Currency swaps: These entail swapping both principal and interest


    between the parties, with the cash flows in one direction being in a
    different currency than those in the opposite direction.

    2) On the basis of market mechanisma) OTC ( Over-the-counter)


    Over-the-counter (OTC) or off-exchange trading is to trade financial
    instruments such as stocks, bonds, commodities or derivatives directly
    between two parties without going through an exchange or other
    intermediary.

    The contract between the two parties are privately negotiated.

    Over-the-counter markets are uncontrolled, unregulated and have


    very few laws.

    b) Exchange-traded Derivatives
    Exchange traded derivatives contract (ETD) are those derivatives
    instruments that are traded via specialized Derivatives exchange or
    other exchanges. A derivatives exchange is a market where individuals
    trade standardized contracts that have been defined by the exchange.
    The worlds largest derivatives exchanges (by number of
    transactions) are the Korea Exchange.
    There is a very visible and transparent market price for the
    derivatives.

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