Question

what are the use of derivatives ? explain with your own words . thank u

Answer 1

The benefits of using derivatives are as follows :-

1. Hedging - derivatives are often used to hedge the value of underlying to reduce risk. For example - you are in the business of producing jewellery and you think in future price of gold may increase in future so you fix the price of gold today by paying a premium so in a way transaction gets hedged

2. Speculation - derivatives are commonly used for speculation purposes and betting by searching for inefficiency and finding the transaction which are not equal to their intrinsic value

3. Asset prices determination - Derivatives are also used to price the future spot prices of commodities using available futures prices

4. Access to unavailable commodities - derivatives are also used to invest in unavailable commodities like gold and sugar which are anyway unavailable.

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