Derivatives (Part 1/ Basics)
Hey,
because I want to link some of these explanations, but really no one has bock to always read my whole post:
The following is a split of the already existing Derivatives Guide into smaller posts. If you already know him please just ignore :), merci
For the other parts or the whole Derivate Guide please read the attached post on my profile.
Basics
1) When do you use "derivatives"?
2) Overview: What are derivatives?
1) Why and when to use derivatives?
Actually, derivatives were intended as an instrument to hedge against price fluctuations of certain underlying assets. (See Part 2 for an example)
However, a large part of derivatives trading consists of speculation (mainly institutional, partly private). With the help of derivatives, investors try to take advantage of what they consider to be an incorrectly estimated probability of occurrence on the market.
If you buy a share, you want to profit from rising prices. However, if you want to profit from falling prices, you can also do this with a suitable derivative.
[Forward transactions in particular are also used for hedging and arbitrage].
Derivatives are used for speculation, as the investor does not directly buy a share certificate with a derivative, but a theoretical right to buy the share at a later date at a specific price. Logically, the price for this right fluctuates and depends, among other things, on how much the underlying price moves.
This also results in the leverage effect of some derivatives. For while a direct investment in the share only yields a profit of 20 percent when the share price rises from 100 to 120 euros, the same increase in the underlying value (20 percent) enables a disproportionately greater profit of several 100 percent with a reduced investment. [theoretically]
! On the other hand, there is the risk of a total loss of the invested capital !
This is because if the share is quoted below the price when the warrant matures, and in addition the right to acquire the share has been fixed, the corresponding warrant is worthless and expires.
2) Derivatives as an umbrella term
Derivatives are financial products that are based on an underlying asset. If you are looking for a leverage product based on a share, bond or commodity, you are looking for a derivative.
[Derivatives can also be derived from price, interest rate, volatility changes or key figures, among other things].
! They are by no means only high risk toys for risk-loving private investors, many derivatives are an important financial instrument for institutional investors!
[Not only hedge funds and banks, also companies from other industries use options, especially those that depend on buying & selling prices].
Types of derivatives are for example. options, warrants, futures, certificates and reverse convertibles. The best way to sort these is into:
Futures (later trading date, obligatory trading at the option price)
Option transactions (later trading date, possible trading at option price)
Swaps (later possible trading date, mandatory trading)
