Financial Derivatives products are a type of financial instrument that bases its value on the price of a second asset, known as the ‘underlying asset’. In other words, when trading a derivative product one is trading on the value of an underlying asset, but without actually owning the underlying asset. Due to this, the most outstanding characteristics of derivative products are leverage, a high level of risk and lower commissions than in normal products.
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Definition Of Financial Derivative
The financial derivative is a contractual agreement where the basic value is based on an underlying asset, which can be a stock, an index, or any currency (such as Ripple or bitcoin ).
Types Of Derivatives
It is perhaps the most popular of all derivative financial products. CFDs or contracts for difference ) allow you to speculate on the rise or fall of the prices of the vast majority of world financial instruments, from currencies (even allowing you to buy Litecoin and other cryptocurrencies), to indices (such as the IBEX 35 in time real ), stocks, or commodities such as crude oil, gold, or silver.
CFDs are traded through an instrument that will reflect the movements of the
underlying asset. The contract is opened between two parties, one that owns the asset and the other that covers the difference in the price of the asset between two points in time. If the price falls. The holder will benefit, since he will not bear the falls. And vice versa.
• Futures Contract Futures
contracts are common derivatives based on an agreement to buy or sell assets such as commodities or safe-haven securities paid for later. But at a stated price. Futures are standardize to facilitate operations on the futures exchange where the detail of the underlying asset depends on the quality and quantity of the commodity.
• Forward contracts
They are those financial instruments that are established with a more informal agreement and operated through a broker that offers operators the opportunity to buy and sell specific assets such as currencies. Here too, the price is set and paid at a future date.
Trading options in the derivative markets provides traders with the right to buy (BID) or sell (BID) an underlying asset at a specified price, on or before a certain date with no obligation that this be the main difference between the futures and options trading.
• Swaps (Exchanges)
Another very common derivative used in contracts at the time of operation are the “swaps” (exchanges), which allow both parties to exchange capital flow sequences in a given amount of time. There is no exchange or trade of instruments, but rather an over-the-counter (OTC) contract between two traders.
Why Trade Financial Derivatives?
Derivatives we originally use to ensure that there would a harmonious balance in exchange rates for goods and services operate on a global scale. Traders found that with the differences between currencies and accounting systems. It would easy for traders to find a common derivatives market.
Today, the main reason for trading derivatives is for speculation and hedging purposes. Traders seek to profit from changes in the prices of underlying assets Stocks and indices. Derivatives show in different ways. Such as the types use for hedging or to minimize risks.
The Main Advantages Offer By Derivative Products Are The Following:
- Low commissions or entry payments to enter the operation since the underlying asset is not own.
- High leverage. So with an entry price of 10 euros one can have a market exposure of 100 or 1,000 euros. Which can be both beneficial and risky.
- They offer various coverage systems for the positions that one has open.
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Also Read: Most Popular Currency Pairs.