Derivatives
Derivatives are financial instruments which
derives its value from the underlying asset.
Feeling quite heavy right? No worries. Let’s
understand it through an example.
Let’s assume that we all are very much fond
of music, who won’t be, right? So there
is a big music concert going to happen in
town by a famous musician.
The tickets are sold at Rs.100. Your friend
who is in that music troop has given you a discount
coupon, which you can use to purchase the same
tickets at Rs.75. So what is the benefit you
are getting from this discount coupon?
that’s right, you save Rs.25. That is the
value of that coupon. This discount coupon
in our example is the derivative, because the value of the discount coupon depends on the value of the ticket
As and when the ticket prices rises, value of your discount coupon also increases.
Imagine that as the date comes closer, the ticket value goes up to Rs.150.
Then the value of our derivative, which is the discount coupon,
goes up to (150-75) Rs.75. This goes to say that though the actual ticket value is Rs 150
because you have a discount coupon you can get the same ticket for Rs.75, hence the value of the discount coupon is Rs.75
Say the concert got
cancelled as the musician got sick. Then no
one will be interested in our discount coupon, because the concert is not happening. and hence the value of the discount coupon will be zero
Hope you have enjoyed learning with Finmaestro.
