Derivatives Contracts

Topic 

Derivatives Contracts

Instructions

1. What derivatives are and how are they used to manage risk.
2. Distinguish between forwarding contracts and futures contracts.
3. Compare and contrast the various types of swap contracts

Answer Preview 

Derivatives are private contracts that are derived from the value of certain assets such as bonds. The agreement between the insurer and the insured of a derivative explains who has the right to sell or buy the underlying security. The main aim of this contract is to break the risk factor attached to the asset smaller units that are manageable. For example, if an investor feels that a company might fail to meet its earnings per share as expected, he/she might hedge the contract such that his minimum expectations are met.

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