MMP321 Study Guide - Final Guide: Futures Contract, Interest Rate Cap And Floor, Financial Instrument
31 May 2021
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Document Summary
A derivative is a financial security that derives its value from an underlying asset. A derivative products value is determined by the value of the underlying asset. For example, if the underlying asset increases in the value the value of a derivative that gives the holder the right to buy will also increase. Therefore the returns from derivative are based on the returns of the underlying asset. The holder of a derivative has the right to buy or sell the underlying asset at a certain point in the future at a price that is agreed upon today. The holder of a derivative does not own the underlying asset. The purchaser of the futures contract is required to deposit a margin with the exchange to protect against losses that may be incurred from the contract (reducing risk of default). Most futures contracts are settled by payment in cash of the profit or loss from the contract.
