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Page 1 Lets take an example… Page 2 Lets take an example… Derivatives • Itisacontract • Ithasnovalueonitsown • Itsvalueisdependentonthevalueoftheassetitisbasedon A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the underlying asset. Page 3 Lets take an example… Derivatives • Itisacontract • Ithasnovalueonitsown • Itsvalueisdependentonthevalueoftheassetitisbasedon A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the underlying asset. Types of Derivatives Forwards Options Swaps Futures Page 4 Lets take an example… Derivatives • Itisacontract • Ithasnovalueonitsown • Itsvalueisdependentonthevalueoftheassetitisbasedon A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the underlying asset. Types of Derivatives Forwards Options Swaps Futures Forwards A contract between two parties, where one party agrees to buy and other party agrees to sell, a specified quantity of an asset at the specified price at a specific date in future. • Bilateral private contracts • Traded OTC • Customized contract • Settled by delivery of asset Page 5 Lets take an example… Derivatives • Itisacontract • Ithasnovalueonitsown • Itsvalueisdependentonthevalueoftheassetitisbasedon A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the underlying asset. Types of Derivatives Forwards Options Swaps Futures Forwards A contract between two parties, where one party agrees to buy and other party agrees to sell, a specified quantity of an asset at the specified price at a specific date in future. • Bilateral private contracts • Traded OTC • Customized contract • Settled by delivery of asset Futures Futures contract is an exchange-traded contract to buy or sell an underlying asset at a future date at an agreed price.Read More
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FAQs on Basics of Derivatives - NABARD Grade A & Grade B Preparation - Bank Exams
| 1. What are derivatives in financial terms? |  |
Ans. Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or rate. Common types of derivatives include futures, options, and swaps. They are used for various purposes, including hedging risk, speculation, and arbitrage.
| 2. How do derivatives work in the context of risk management? | |
Ans. Derivatives help manage risk by allowing investors to hedge against price fluctuations in the underlying asset. For example, a farmer can use futures contracts to lock in prices for their crops, protecting themselves against potential losses due to price drops at harvest time.
| 3. What are the main types of derivatives used in banking? | |
Ans. The main types of derivatives used in banking include:
1. Futures: Contracts to buy or sell an asset at a predetermined price at a specified future date.
2. Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price within a certain time frame.
3. Swaps: Agreements to exchange cash flows or other financial instruments between parties.
| 4. Why are derivatives considered high-risk investments? | |
Ans. Derivatives are considered high-risk investments due to their potential for high leverage, which can amplify both gains and losses. The complexity of these instruments also makes them difficult to understand and manage, leading to significant financial risks if not used properly.
| 5. What role do derivatives play in the global financial markets? | |
Ans. Derivatives play a crucial role in global financial markets by providing liquidity, enabling price discovery, and allowing for efficient risk management. They help participants manage exposure to various risks and contribute to the overall stability and functioning of financial systems.
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Sep 07, 2025
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