There is a group of wheat farmers who have decided to sell their produce at a later date. This is because according to them there shall not be any change in price by that date. Here the derivative or the underlying asset is wheat. And its price is decided according to the current rates of the wheat in the market at this moment.
The products of which the values are derived from variables like index rates, reference rates, underlying assets are known as derivatives. All of these variables are made to work in a contractual format.
Following is a list of probably underlying assets:
- Equity
- Forex
- Commodity
- Other assets
Read the following example to understand the Derivatives trading better:
Financial derivatives have shown a rapid and terrific growth over the years since 2005. And the main reasons for this according to experts is the variety in the number of instruments available in the market in addition to the complexities that are an inherit part of Derivatives trading. Also, the turnover and profit margins too can be really high in this market.
For those who are planning to invest in equity derivatives, Futures and Options is the first choice globally. People prefer trading in F&O derivatives more than any other individual stock derivatives today.
Another trend worth observing is that there is a high level of correlation between all of the popular derivative indexes. Add ease of use and a variety of indexes and you get the perfect recipe for success. Nowadays, there is a flurry of activity in Derivatives trading. It is surprising to note that not only large-sized institutional investors are a part of the derivative trading game but there are a lot of small investors too who are major players in the market. It is the presence of so many players in the market that has made trading exciting and worthwhile. And this fact also contributes to higher profits.