Derivatives do away with the need to invest a large amount of capital upfront and allowing you to benefit from market movements. This gives you greater liquidity than most other assets. They are an excellent avenue to help you leverage on anticipated market movements and an effective tool to hedge your risks, speculate and earn returns in a relatively shorter duration. You can trade in Futures – contracts or an agreement between two parties to either buy or sell a fixed quantity of assets at a particular time in the future for a fixed price OR Options – A similar contract, except the parties are not obligated to fulfill the terms of the agreement. These contracts are then traded in the market.
Benefits of Derivatives
Unsurprisingly, derivatives exert a significant impact on modern finance because they provide numerous advantages to the financial markets:
1. Hedging risk exposure
Since the value of the derivatives is linked to the value of the underlying asset, the contracts are primarily used for hedging risks. For example, an investor may purchase a derivative contract whose value moves in the opposite direction to the value of an asset the investor owns. In this way, profits in the derivative contract may offset losses in the underlying asset.
2. Underlying asset price determination
Derivatives are frequently used to determine the price of the underlying asset. For example, the spot prices of the futures can serve as an approximation of a commodity price.
3. Market efficiency
It is considered that derivatives increase the efficiency of financial markets. By using derivative contracts, one can replicate the payoff of the assets. Therefore, the prices of the underlying asset and the associated derivative tend to be in equilibrium to avoid arbitrage opportunities.
4. Access to unavailable assets or markets
Derivatives can help organizations get access to otherwise unavailable assets or markets. By employing interest rate swaps, a company may obtain a more favorable interest rate relative to interest rates available from direct borrowing.
Why invest with us?
Whether you are an active trader who believes in making the most of market opportunities or a new trader seeking information on futures, options and derivative strategies, our dedicated research and advisory team is well equipped to help you make informed and well-timed decisions on the move. Our unique range of customized products, are designed to help you leverage your intraday and long term positions.