Question

if you CEO of an X company when will you decide to buy derivatives , include examples ?

Answer 1

The main derivatives are Futures and Options althogh there are few more but the popular ones which get trded in market are Futures and options

In options , i can either buy put option or call option. Put option is taken on company when you expect price to fall of underlying company in nera future whereas call option is taken on company when you expect price to rise of underlying company.

Lets take an example of Call option

Suppose share price of apple is trading at 250 and one month call option is trading at 3 dollar . After one month suppose share price is 255 then you will exercise the option and gain 255-25-3= 2 dollar . if share price falls below 250 then you will not exercise the call option and you will suffer loss of 3 dollar only being premium paid

The same goes with Put option but you gain in that when sale price falls since you estimted it will fall in future so if it falls put value will rise

Another Derivative is Futures in wich the future value of apple is being trading currently

For example, share price of apple today is 250 and one month future price is 252 . so if you think after month share price of apple will be more than 252 then yo will take future contract of apple. Future contract is entered today but settlement is done on expiry.

The question that you have put acrossed to me is when to buy. Now this question is quite complex because various call , put option and futures are all different and call on them are taken after deep analysis on any stock

Now let me tell you one more thing Waren Buffett said that derivatives are example of mass destruction because if share price fluctuates by 1% then derivatives fluctuate with more than 5%, the risk is quite high here. It can make you or break you at one go.

if was a CFO of any company then i would hae avoided derivatives and worked on delivery based shares only.