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Example of Derivatives Video Lecture | Crash Course for MAT
FAQs on Example of Derivatives Video Lecture - Crash Course for MAT
| 1. What are derivatives? |  |
Ans. Derivatives are financial instruments that derive their value from an underlying asset. They are contracts between two parties, where the value of the derivative is based on the fluctuations in the price of the underlying asset.
| 2. How do derivatives work? | |
Ans. Derivatives work by allowing investors to speculate or hedge against price movements in the market without owning the actual underlying asset. They provide opportunities to profit from both upward and downward price movements through buying or selling contracts based on the expected future value of the asset.
| 3. What are the main types of derivatives? | |
Ans. The main types of derivatives include futures contracts, options contracts, swaps, and forward contracts. Each type has its own characteristics and usage, such as futures contracts being used for standardized trading on exchanges, options contracts giving the right to buy or sell an asset at a predetermined price, swaps for hedging interest rate or currency risks, and forward contracts for customized agreements between parties.
| 4. Why are derivatives important in financial markets? | |
Ans. Derivatives play a crucial role in financial markets as they provide liquidity, risk management, and price discovery. They allow participants to manage and transfer various types of risks, such as commodity price fluctuations, interest rate changes, and currency exchange rate movements. Additionally, derivatives can provide leverage, allowing investors to control a larger position with a smaller amount of capital.
| 5. What are the risks involved in trading derivatives? | |
Ans. Trading derivatives carries certain risks, such as market risk, counterparty risk, and liquidity risk. Market risk arises from the volatility and uncertainty of the underlying asset's price movements. Counterparty risk refers to the possibility of the other party defaulting on their obligations. Liquidity risk arises when it's difficult to buy or sell derivatives due to low trading volumes. It is important for investors to understand these risks and use appropriate risk management strategies when trading derivatives.
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