Derivatives Market: An Overview

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A derivatives market is a financial market for derivatives trading, and can be subdivided into two segments which are namely options and futures over-the-counter trading.  It complements the cash or spot market. Euronext and futures exchanges like the Chicago Mercantile Exchange, trade in standardized derivative contracts on futures and options.

Options are issued for a period of three months. Parties taking long position, go hand in hand with those taking short positions. If it were not for closing the previous long position, the sellers would be short.

Futures markets are among the most promising markets that complement the spot or cash markets. Futures markets exist because future economic developments are not entirely predictable, and people revolve around the same publicly available knowledge of different expectations.

In the foreign exchange market, it can be observed that the forward exchange rate usually differs from the spot exchange rate, because of an interest rate difference between the traded currencies and/or expectations of market participants about future devaluations of the currencies concerned.

On the futures market impact of data changes is more intense on market expectations than on the cash market, because the period to conclude transactions is greater and they are accompanied by a higher probability of data changes.

The deferred settlement date for speculation on a low cost but uncertain development can mislead the market price in the future, which should facilitate the resolution of the forward engagement without the use of its own assets or a loan through a profitable closing transaction.

Typically, with stock market transactions, the risks of leverage and the total loss of the invested capital and the risk of having to use additional resources are inter-related.

Futures markets offer the savvy investor a number of additional investment alternatives, and each of the personal market expectations and the psyche, can be especially adapted to individual risk preferences.

Customized derivatives which are not traded on a futures market are traded on the OTC market. And they comprise of investment banks which have traders that make markets in such derivatives. The clientelle also include commercial banks, hedge funds, government sponsored entities, etc. Swaps, forward rate agreements, forward contracts, credit derivatives, among others are always traded on the over-the-counter markets.

Interest rate instruments a key driver of trading in major derivatives trading centers around the world, accounting for 88% of UK turnover and 70% of global notional value. Derivatives which entail foreign-exchange contracts make up for a additional 10% of notional value, while credit, equity-linked and commodity contracts also play an vital role.

 

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