What is equity derivatives

what is equity derivatives

Answers

Best Answer:   The Equity derivatives are Futures and Options. They are called derivatives because they are financial instruments derived from an underlying main instrument like Stocks.

Options: It is a conatract entered between two parties one seller and the other buyer with right on the part of the buyer but not the obligation to buyer to purchasing certain quantity of the underlying stock at future date called the 'expiration date' at a fixed price called the 'exercise price'. There are two types of options one called 'call option' and the other 'put'. Put is similar to call except that one contracts to sell instead of buy. The seller of either of the options is also called a 'writer'.

If you are buyer of a call option if the price goes up beyond the exercise price on the expiration day you will gain by the amount which is the difference between that days price of the

underlying security and the exercise price.

There are two types of Options, American and European. American options can be liquidated any time between the date of contract and expiration date where as European option cannot be. European options has to be held till expiration day.

Futures:

It is a contract entered between two parties to buy certain amount of the underlying security at a future date at a future price. You can buy and sell futures. It has no specific name like Options. Here sometimes delivery of the underlying physical asset is undertaken though in Options most of the time this is not done.

It is more complicated to explain the physical delivery side tradig so left to you to figure it out from the infromation I have given, like if you hold physical asset futures can be used to hedge the price fluctuations which will adversley affect the price of the physical asset against you.

Source: sg.answers.yahoo.com

Category: Forex

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