Can anybody answer in simple terms as to what is meant by DERIVATIVES is stock business?

Question

My relative told me that he is working as derivation administrator in the stock exchange. I want to know what is derivative?

Answer 1

A derivative is a generic term for specific types of investments from which payoffs over a time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices's (such as a stock market index, consumer price index (CPI) or an index of weather conditions). This performance can determine both the amount and the timing of the payoffs. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. The main types of derivatives are futures, forwards, options and swaps.

Answer 2

Any financial asset that derives its value from another is called a derivative. Derivatives are generally associated with 'Futures' contracts. A Futures contract involves sale or purchase of any asset at a specific date in the future. For example, if you contract to buy a 100 shares of any listed company at a specific price on October 31, 2006, you have entered into a Futures contract. This can be made even more interesting, which is where derivatives come in. If you buy a Right but not an obligation to buy these shares on October 31, 2006, you have just bought a Call option (and someone has sold it to you). If you buy a Right but not an obligation to sell these shares on October 31, 2006, you have just bought a Put Option (and someone has sold it to you). These types of deals are derivatives transactions as both the Put and the Call Options derive their value from the value of the underlying asset namely the listed shares.