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Definition and types of Derivatives- Derivatives are financial instruments that are derived from bank loans, bonds, currencies, money market instruments, equities, and commodities. These constitute tools for the management of risk. Hedging strategies depend on the use of derivatives. Most of these instruments are discussed in detail in the next chapter ‘Internal Rate Risk.’ Derivatives are used by banks to hedge risks, to gain access to cheaper money and to make profits. Types of derivatives are
- Futures
- Options
- Swaps
- Warrants
- Swaptions
- Collars
- Caps
- Floors
- Circuses
- Score
Derivatives are financial instruments that have values derived from other assets like stocks, bonds, or foreign exchange. Derivatives are sometimes used to hedge a position (protecting against the risk of an adverse move in an asset) or to speculate on future moves in the underlying instrument. Hedging is a form of risk management that is common in the stock market, where investors use derivatives called put options to protect shares or even entire portfolios.
The growth in financial markets, globalization of the major stock exchanges, increase in the number of players in the markets, and the creation of new financial opportunities led to the creation of a wide array of instruments tailor-made to manage the evolving risk-return profile.
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