Question

What are the different types of derivative securities and how are they used in the market?

Answer 1

Various types of derivative securities are as follows-

A. Futures contract- these are the standardized contracts and this will be providing and opportunities for various market participants to hedge their position and they can also a speculate in order to maximize the rate of return. These contracts are traded on exchanges and they have a high level of transparency.

B. Option contracts- these contracts are not obligated in nature and they will be providing with the right to buy or right to sell before a certain maturity date and these contracts will also provide a better chance to Hedge the portfolio and it will also provide lower cost and hedging of the portfolios.

C. Forward contracts- forward contracts will be offering with customisation of contracts which are entered between the two parties and there will be high level of individual risk associated because these contracts will not be traded on the exchanges, so this will be also used in heading an exposure.

D. Swaps- swaps are another form of derivative contract in which the risk related to exposure is swapped with another party like interest rate swap will be providing with swapping of the fixed rate of interest with this floating rate

E. Swaption- swaptions are combination of both swaps and options and it will be helping in swapping the risk as well as having a right to exercise that so it will also provide contract holders in order to Hedge their risk in future Markets.