RMI-2302 Lecture Notes - Lecture 10: Futures Contract
26 Oct 2016
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Risk in business and society - notes 10a. A derivative is a contract between two or more parties whose value is based on an agreed- upon underlying nancial asset, index, or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes, and stocks. Futures contracts, forward contracts, options, swaps and warrants are common derivatives. A futures contract, for example, is a derivative because its value is affected by the performance of the underlying contract. Similarly, a stock option is a derivative because its value is derived from that of the underlying stock. Derivatives can be used as a hedge. Since many trades are unregulated , there is little oversight to see how risky some of the. Positions that are being taken by individuals or organizations are. Legitimate hedging function - they are a risk management tool. Amplify (leverage) returns (both good and bad) No one knows exactly how big the derivatives market is.
