What Are Derivatives?
Derivatives and Exchange RatesDerivatives were generally used to balance exchange rates of goods traded in the international arena. Specifically, due to the fluctuating nature of different currencies, there was a great need for a system that would account for these differences. Thus, the derivative emerged. In contemporary time, they are used in a multiplicity of ways. Another point to take note of is that due to the various securities available, there are also different types of derivatives in the market. This difference is seen in their functions and applications.
Examples of common derivatives include:
Common Use of DerivativesThe common use of derivatives today is for speculation. This speculation is carried for the sole purpose of benefiting from the profit that accrues from changes in the price of an asset. Another area in which derivatives are commonly used is in hedging. Hedging enables one to transfer the risks of underlying assets between the contracting parties. Another use of derivatives is for insurance purposes. They provide insurance to some certain degree. This is because both the supplier and consumer in both aspects are locking in on a guaranteed price and supply respectively, though this limits the producer in that they will not benefit from the increased revenue when prices rise. In conclusion, derivatives have to be used decisively. If you are contemplating using them, you should make a point of understanding them and using a cost-benefit approach in applying them.
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