Derivatives Literature review Example | Topics and Well Written Essays - 1750 words

Derivatives - Literature review Example AP, (2011), derivative transactions entail a number of financial contracts such as forwards, collars, futures, floors, caps, options, swaps, deposits, and structured debt obligations. With reference to the writings by Durbin (2011), the origin of derivates is traced back to the 18th century whereby the earliest form of derivatives known as rice futures were been traded on the Dojima Rice Exchange. In the studies conducted by Hull (2009), he stated that derivatives are essentially contracts between two parties who have agreed on certain conditions under which financial transactions are to be settled and he further added that the most commonly used underlying assets in derivative transactions include currencies, interest rates, stocks, bonds, and commodities. Derivative contracts are categorized into two groups that comprise of the exchange-traded derivatives, which are derivatives that are transacted in a specialized derivatives exchange. The second group of derivatives is the private ly traded derivatives that are traded over-the-counter and therefore, the transactions are not undertaken with the assistance or expertise of an intermediary or the exchange platform (Institute for Financial Markets, 2011). An example of the privately traded derivates is the swaps. Additionally, derivatives are categorized as either option products or lock products; Shirreff (2004) stated that option products give buyers certain rights but they are not under any obligation to agree to the contract under the terms stipulated, an example of an option product is interest rates caps. While lock products underpin the parties in the contract to the terms stipulated until the expiry of the contract, examples of lock products include forwards, futures, swaps. It is of essence to note that the... This paper stresses that derivative contracts are categorized into two groups that comprise of the exchange-traded derivatives, which are derivatives that are transacted in a specialized derivatives exchange. The second group of derivatives is the privately traded derivatives that are traded over-the-counter and therefore, the transactions are not undertaken with the assistance or expertise of an intermediary or the exchange platform This essay declares that derivatives are categorized as either option products or lock products; Shirreff stated that option products give buyers certain rights but they are not under any obligation to agree to the contract under the terms stipulated, an example of an option product is interest rates caps. While lock products underpin the parties in the contract to the terms stipulated until the expiry of the contract, examples of lock products include forwards, futures, swaps. It is of essence to note that the classification of derivates is mainly based on four main factors that include the type of underlying assets entwined with the derivate, the relationship between the derivative and the underlying asset, the market that the derivative transaction will take place, and the returns they offer. The parties involved in the over-the-counter derivative transactions include hedge funds and banks, and this market is the largest in the overall derivatives. Because of the fact that transac tions are performed on private level it means that there is minimal disclosure of information to the public concerning the market and for this reason it remain less regulated.