Investment Choices - Financial Derivatives Home

Financial Derivatives Home

As its name suggests, financial derivatives are securities that derive their value from the value of another security, i.e. underlying asset. The value comes from the inherent rights attached to them and the lifetime of such rights.

The term "derivative" came into widespread use in the mid-80's. People use a grea deal of creativity and ingenuity to create a wide variety of derivative securities. The most common types of derivatives are options, futures, forwards, and swaps, among many others.

Why using derivatives?

There are a number of reasons for using derivatives in financial market. The most often mentioned reasons are:

Risk hedging - This is the very first reason people created the financial derivatives.
Arbitrage and Speculation - Speculators try to beat the market and become rich by buying and selling derivatives. Some of them did become rich. But some got broke.
Market entry and exit strategy - Company also use derivative tools to raise capital, especially equities. For example, company will issue rights or warrants to raise additional capital.

People's creativity give birth to as many as derivatives as investor can imgaine.

Financial Derivatives Home

Why using derivatives?

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Financial Derivatives