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Introduction to Derivatives or Idea of Derivatives Video Lecture | Mathematics (Maths) Class 11 - Commerce

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FAQs on Introduction to Derivatives or Idea of Derivatives Video Lecture - Mathematics (Maths) Class 11 - Commerce

1. What is a derivative?
Ans. A derivative is a financial instrument that derives its value from an underlying asset, such as stocks, bonds, commodities, or currencies. It allows investors to speculate on the price movement of the underlying asset without owning it directly. Derivatives can be used for hedging, speculation, or arbitrage purposes.
2. How do derivatives work?
Ans. Derivatives work by establishing a contract between two parties, where they agree to exchange the difference in the value of an underlying asset from the time the contract is initiated until it expires. This difference is commonly known as the "derivative's price" or "underlying asset's price." The value of the derivative is influenced by changes in the underlying asset's price.
3. What are the types of derivatives?
Ans. There are various types of derivatives, including futures contracts, options contracts, swaps, and forward contracts. Futures contracts establish an obligation to buy or sell an asset at a predetermined price and date. Options contracts provide the right, but not the obligation, to buy or sell an asset at a specific price within a certain timeframe. Swaps involve exchanging cash flows or liabilities between two parties, while forward contracts are agreements to buy or sell an asset at a future date for a predetermined price.
4. What are the purposes of using derivatives?
Ans. Derivatives serve several purposes, such as hedging, speculation, and arbitrage. Hedging involves using derivatives to offset potential losses or protect against adverse price movements in the underlying asset. Speculation involves taking on risk to potentially profit from anticipated price movements. Arbitrage seeks to exploit price discrepancies between different markets or related assets to make risk-free profits.
5. Are derivatives risky?
Ans. Derivatives can be risky due to their leverage and complexity. Leverage amplifies both potential gains and losses, meaning that a small price movement in the underlying asset can result in significant gains or losses in the derivative's value. Additionally, the complexity of derivatives requires a thorough understanding of their mechanics and associated risks. It is crucial for investors to have sufficient knowledge and risk management strategies in place when trading derivatives.
85 videos|243 docs|99 tests

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