Derivative Essay

1901 Words Sep 4th, 2010 8 Pages
A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.
Some of the widely known underlying assets
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It can also be referred to as default or counterparty risk. It varies with different sources. * Market Risk: This is a kind of financial loss that takes place due to the adverse price movements of the underlying variable or instrument. * Liquidity Risk: When a firm is unable to devise a transaction at current market rates, it can be referred to as liquidity risk. There are two kinds of liquidity risks involved in the scenario. First is concerned with the liquidity of separate items and second is related to supporting the activities of the organization with funds comprising derivatives. * Legal Risk:Legal issues related with the agreement need to be scrutinized well, as one can deal in derivatives across the different judicial boundaries.
Derivatives Markets in India
India had started with a controlled economic system and from there it moved on to become a destination that witnesses constant fluctuation in prices on a daily basis now. Persistent efforts of Reserve Bank of India (RBI) in building currency forward market and liberalization process provided the risk management agencies their much needed momentum. Derivatives are the indispensable components of liberalization process to handle risk. With National Stock Exchange (NSE) measuring the market

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