Wednesday, 18 December 2013
Reducing the market risks through Derivatives
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| Flow of a Derivative market. |
As we all know, the financial markets
are extremely volatile. Given that foreign currencies, petroleum prices and
other commodities, equity shares and instruments tend to fluctuate all the
time, there poses a significant risk for the investors to get linked with such
fluctuations. For them, this risk can be reduced through a financial product
called the derivatives. These are nothing but products whose value is derived
from one or more basic set of variables called the underlying assets or base.
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| Derivative assets growth in 2007 - 2008 |
To put
it simply, derivatives are somewhat a financial security such as an option or
future whose value is derived in parts from the value or another underlying
asset. Here, the primary objective of an investor will be to bring an element
of certainty or safety of enjoying returns with the minimum risks possible. To
sum it up, the derivatives market are contracts that
were introduced with an aim to limit the risks for an investor.
So
basically, a derivative is a somewhat a security derived from a debt-based
instrument, shares, loan, whether secured or not, a risk instrument or contract
for difference or any other form of security. These can be standardized and
traded on the online share trading world. Such ones are specifically called as
exchange-traded derivatives. They can also be customized as per the needs and
requirements of the user by negotiating with another party.
Let’s
have a look into the different advantages one can avail of through trading in
derivative market:-
·
Such funds help the investor by transferring any risk from
themselves to risk oriented people.
·
They also help in discovering future prospects as well as the
current prices.
·
Derivatives help catalyze entrepreneurial activity.
·
They prove to be saving-friendly and a good investment in the long
run.
·
They happen to increase the volume of the trade carried out in the
markets because of participation of risk adverse people in huge numbers.
Derivative market - Learn to Trade
So if you are already a player in the world of
financial markets making big investments, you have a way to somewhat reduce the
risk of market volatility.
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