Preview
Preview

History and Classfication of Derivatives Essay

No Works Cited
Length: 824 words (2.4 double-spaced pages)
Rating: Yellow      
Open Document




- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Classification of Derivatives: Derivatives are classified in terms of their payoffs and as exchange traded and over the counters.
• Linear Derivatives: Linear Derivatives have linear payoff. E.g. Futures and forwards.
• Non Linear Derivatives: Non Linear Derivatives have non linear payoffs. E.g. Options.
• Exchange traded: These are standardized instruments and are backed by clearing house. So there is no default risk. E.g. Futures.
• Over the counters: Over the counters are customized contracts and they bare default risk. E.g. Swaps and Forwards.
Histroy:
The history of derivatives is quite colorful and surprisingly a lot longer than most people think. Derivatives were first instruments developed to secure the supply of commodities and facilitate trade as well as to insure farmers against crop failures. The history of derivatives provides evidence that the first derivatives markets were over the counter (OTC).
Early history of derivative markets in the US:

In 1848: Creation of the Chicago Board of Trade (CBOT) and Creation of the (To-Arrive) contract for grains are formed. In 1865: forward contracts become Standardize. In 1874: Chicago Produce Exchange was created. In 1919: CPE becomes the Chicago Mercantile Exchange. In 1925: First futures clearinghouse was created. In 1922: Futures Act for Grains. In 1936: Options on futures are banned. In 1955: Corn Products Refining Company decision made by the Supreme Court.
Modern brief history of derivatives in the US:
In 1972: International Monetary Market (IMM) for trading currency futures was created. In 1975: first interest rate futures contract create by CBOT. In 1975: Treasury bill futures contract (& options) by CBOT. In 1977: T-Bo...


... middle of paper ...


...certain cash crunch. if credit rating falls then an institution might lose liquidity and experiences sudden unexpected cash outflows or may some other event that causes counter-parties to avoid trading.
Market Risk: Fluctuation in the prices of that underlying asset cause market risk. This Market risk comprises of four risk factors which include Interest rate risk, Commodity risk, Equity risk and Currency risk. In general risk varies from sector to sector.
Banks use derivatives to hedge against risks that may affect their earnings and other operations which include market risk, counter-party risk interest rate risk and foreign exchange risk.
Farmers use derivatives to lock the price of their crops in order to save their harvest so that they are exposed to price risk.
The importance of derivatives is increasing day by days because of high volatility in the market.






Click the button above to view the complete essay, speech, term paper, or research paper

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »
title







This essay is 100% guaranteed.


Title Length Color Rating  
Essay on Financial Instruments: Classification of Derivatives - ... Derivatives Designed by Greek Philosophers: In history trace of derivatives can be found in Aristotle’s Politics. Aristotle tells the story of Thales (mathematician and philosopher) lived from 625 to 550 BC in Miletus (city of Ancient Greece). Thales predicted in wintertime an unusually massive olive crop. He seized the opportunity to negotiate with the owners the right but not the obligation to hire the entire crop in that region for the next autumn....   [tags: linear, non linear derivatives] 1987 words
(5.7 pages)
Better Essays [preview]
History of the Korean Derivatives Market Essay - Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows: Table 2.3: History of the Korean Derivatives Market May....   [tags: Economics]
:: 6 Works Cited
676 words
(1.9 pages)
Better Essays [preview]
Impact of Future Derivatives on Stock Market Volatility Essay - Impact of Future Derivatives on Stock Market Volatility Derivatives has been the talk of the financial world after it was accussed as the primary reason for such a deep financial crisis that affecetd the global economy in 2007. Thus, the modelling of asset returns and judging the volatility of stock market and whether the derivatives have a substantial effect on stock market volatility, is still the key task for every finance professional as it provides much needed on risk patterns involved in investment process....   [tags: Stocks, Economy, Finance, Derivatives]
:: 2 Works Cited
1577 words
(4.5 pages)
Powerful Essays [preview]
Is it Hedging with Currency Derivatives Optimal for a Company Essay - Gaining a better understanding of derivative securities with regard to hedging opportunities is essential in today’s financially-driven market. Financial derivative securities are used by many businesses to protect against risks or to profit from them. A company interested in protecting against the risk of some event would be engaging in hedging activities while one seeking to profit from a future event would be speculating (Eiteman, Stonehill, & Moffett, 2010). Hedging and speculation activities can be used against various types of risks faced by companies including those associated with interest rates, costs of commodities, and currency exchanges....   [tags: financial derivatives,foreign currency,total risk]
:: 4 Works Cited
1802 words
(5.1 pages)
Powerful Essays [preview]
Derivatives Users in Pakistan Essay example - ... From the period of January to June of the year 2010, the equity derivatives which were traded monthly were as 211, 000 per average. Institutions do not use the exchange traded derivatives heavily. On the other hand, the individual and other investors used and contributed a lot of the point as 93% of the total value. PRODUCTS IN PAKISTAN Market Review, Product-Line History Product Settlement Basis Since Ready Market Initially on T+3....   [tags: banks, financial markets] 1185 words
(3.4 pages)
Strong Essays [preview]
Notion of Derivatives Essay examples - In the 2002 Berkshire Hathaway annual report, Warren Buffett details how it is that both the discrete and macroeconomic risks of derivative instruments pose a serious threat to the greater financial stakeholder. However, Buffet admits that his firm does use large derivative transactions to facilitate the management of its equity transactions, citing the micro-transactional benefit that can be realized by a party that is able to shift its risks to the financial market. With such a distinction in mind, this paper intends on developing how it is that the risks of derivatives are used in the global financial system to offset discrete financial risks, while replacing them with compounding counter...   [tags: market, risks, firm, transaction] 934 words
(2.7 pages)
Better Essays [preview]
Essay on Function of Derivatives - Bodie, Marcus, and Kane (2011) noted derivatives to be securities that derive value from some other asset, such as a stock, index, or foreign exchange currency. Options, futures, and swaps are derivatives whose payoffs are dependent upon the movement, up or down, of another asset. Derivative securities can be used by both hedgers and speculators to gain profits on or protect the value of an underlying asset. Through various options strategies, hedgers and speculators can ensure payoff amounts or insulate their portfolios from drastic losses....   [tags: Benefits, Portfolio Management]
:: 3 Works Cited
1830 words
(5.2 pages)
Term Papers [preview]
Essay on History of the Universal Decimal Classification System - By definition, the Universal Decimal Classification (UDC) is an indexing and retrieval language in the form of a classification for the whole of recorded knowledge, in which subjects are symbolized by a code based on Arabic numerals.[1] The UDC was the brain-child of the two Belgians, Paul Otlet and Henry LaFontaine, who began working on their system in 1889, 15 years after Melvil Dewey established the DDC.[2] Otlet and LaFontaine built their system on the foundation of the DDC with Melvil Dewey’s express permission....   [tags: library librarian UDC organization]
:: 2 Works Cited
1638 words
(4.7 pages)
Strong Essays [preview]
Essay on History of the Dewey Decimal Classification System - A History of the Dewey Decimal System The history of the Dewey Decimal Classification System (DDC) hearkens back to the very beginning of the modern library movement in the nineteenth century. The classification scheme’s progenitor was a man named Melvil Dewey who was born to a poor family in upstate New York in 1851. 1 His full name was Melville Louis Kossuth Dewey, but he was a man who supported language/spelling reform and had his named shortened to just Melvil Dewey. He even tried to have his family name further shortened to Dui....   [tags: Library Librarian DDC Organization]
:: 4 Works Cited
1347 words
(3.8 pages)
Better Essays [preview]
Enaminone Derivatives Essay - Introduction Enaminone derivatives are highly reactive intermediates extensively used for synthesis of otherwise not readily obtainable, heterocyclic compounds [1-4] and it can be used as starting material for the preparations of N-1 and /or N-2 substituted pyrazoles [29-31]. On the other hand a great deal of interest has been focused on the synthesis of the functionalized pyridine derivative owing to their biological activities [5-8]. In view of these observations and in continuation of our previous work directed towards development synthetic approach for the construction of biologically active heterocycles[9-12], we report herein a facile rout to various pyrazoles , isoxazoles, pyrimidine...   [tags: Chemistry ] 2461 words
(7 pages)
Powerful Essays [preview]