Hedging – is a strategy used to minimize exposure to an unwanted business risk in volatile economies. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment eg. a buyer of a equipment and a seller trading
Hedge Funds : very similar to mutual funds but we hedge the risk by different strategies such as having a portfolio of both equally riskier stocks. Also the SEC regulations are lenient and you dont have to register your hedge fund company.
Derivative – A financial instrument whose value is derived from value of an underlying variable. The variable here can be based on different types of assets such as commodities, equities or stocks, bonds, interest rates, exchange rates or even indexes e.g. stock market index, consumer price index.
Ex: On every thanks giving you want turkeys. But sometimes they run out of turkeys just before thankgiving. so you make contract with the seller that here is x amount and you promise me to deliver the turkey on thankgiving. So here that note/contract is called as derivative (derived from an underliner which in this case is turkey)
Ex: On every thanks giving you want turkeys. But sometimes they run out of turkeys just before thankgiving. so you make contract with the seller that here is x amount and you promise me to deliver the turkey on thankgiving. So here that note/contract is called as derivative (derived from an underliner which in this case is turkey)
Deviatives are traded just like the underlying variable. There are 3 types of Derivatives.
1. Options (in option you reserve the right of not buying the turkeys for a contract made sometime in past) so this is hedging. you pay a fee for making that contract.
2. Futures (the above turkey example)
3. Swaps (interest rates are very floating so you make a contract to swap the interest rate with a fixed rate and so irrespective of the unpredictable interest rate you pay a stable fixed interest rate.)
so in all the types there is an under-liner (gold, silver, weather, stocks, equity, etc)
One use of derivatives is to be used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a wheat farmer and a wheat miller could enter into a futures contract to exchange cash for wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the wheat miller, the availability of wheat.
Derivative Trading: So these contracts/derivatives (could be anything futures, options or swaps) are trader either over an exchange or over the counter.So now these contracts are traded just like the stocks in exchanges. Because the underlying variable which in our example was turkey can be of more demand in future and the derivative holder if trades that in exchange he might get more than what he paid to the seller of turkey thus making a profit.
1. Options (in option you reserve the right of not buying the turkeys for a contract made sometime in past) so this is hedging. you pay a fee for making that contract.
2. Futures (the above turkey example)
3. Swaps (interest rates are very floating so you make a contract to swap the interest rate with a fixed rate and so irrespective of the unpredictable interest rate you pay a stable fixed interest rate.)
so in all the types there is an under-liner (gold, silver, weather, stocks, equity, etc)
One use of derivatives is to be used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a wheat farmer and a wheat miller could enter into a futures contract to exchange cash for wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the wheat miller, the availability of wheat.
Derivative Trading: So these contracts/derivatives (could be anything futures, options or swaps) are trader either over an exchange or over the counter.So now these contracts are traded just like the stocks in exchanges. Because the underlying variable which in our example was turkey can be of more demand in future and the derivative holder if trades that in exchange he might get more than what he paid to the seller of turkey thus making a profit.
Secularization – a process that involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors
Mortgage-backed security – an asset-backed security whose cash flows are backed by the principal and interest payments of a pool of mortgage loans
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