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Derivatives
Derivatives
Derivatives are Futures and Options contracts. They are called derivatives because their price depends upon certain underlying asset that could be a stock, currency, commodity etc. Derivatives include Futures Contracts and Option Contracts.
How to take Advantage of Derivatives
- As often is the case in trading, the greater the risk, the bigger the reward. Derivatives can be used on both sides of the equation, to either reduce risk or assume risk with the possibility of a commensurate reward.
- Derivatives are often used as an instrument to hedge risk for one party of a contract, while offering the potential for high returns for the other party.
- Futures have more leverage than cash (Equity).
- Intraday traders get twin benefits - these contracts are very liquid, plus the costs such as basis expense and brokerage are less as compared to cash market.
- A great risk management tool, derivatives can produce good results, if dealt with judiciously
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