In this video, I have explained all the terms used in derivatives market in very easy language, so that even a layman can understand it. This will help you a lot to understand the concepts of financial derivatives and jargon used in derivatives market across the world.
A derivative is a financial instrument whose value is derived from the value of the underlying asset, which can be commodities, precious metals, currency, bonds, stocks, etc.
Derivatives are basically of four types; Forwards, futures, options and swaps. You ca further bifurcate them in exchange traded derivatives and over the counter derivatives.
Forwards and futures are similar products, however, the futures are traded on exchanges and hence are more standardised, liquid and risk free.
Options gives the holder the right to buy or sell the underlying asset at certain price and at certain future date. The options can be divided into call option and put option. Call option gives the holder the right to buy the underlying at future date at predefined price. Whereas the put option gives the right to sell. To buy an option, the buyer of the options has to pay the premium of the option.
Swaps are generally an exchange of two cash flows.
Options can be called as - In th money, at the money or out the money.
The contracts traded on the exchanges are near a month, next month and far month.
For the futures, the trader has to maintain, initial margin as well as daily Mark to Market.
The video is made for the phase II exam of Grade B Dr, however, it is useful for other exams also. this will help a lot for your interviews.
Basics of financial derivative- Forward, Futures, Options and Swaps
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