Page 6 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Rupesh Roshan Singh, Lovely Professional University
Unit 1: Introduction to Derivatives

Unit 1: Introduction to Derivatives Notes

CONTENTS
Objectives

Introduction
1.1 Meaning and Definitions of Derivatives

1.2 Types of Derivatives
1.2.1 Popular Derivative Instruments
1.2.2 Other Types of Financial Derivatives

1.3 Uses of Derivatives
1.4 Exchange Traded vs. OTC Derivatives
1.5 Summary

1.6 Keywords
1.7 Review Questions
1.8 Further Readings

Objectives

After studying this unit, you will be able to:
 Define derivatives

 Identify the types of derivatives
 Describe the uses of derivatives
 Compare exchange traded vs OTC derivatives

Introduction

In recent decades, financial markets have been marked by excessive volatility. As foreign
exchange rates, interest rates and commodity prices continue to experience sharp and unexpected
movements, it has become increasingly important that corporations exposed to these risks be
equipped to manage them effectively. Price fluctuations make it hard for businesses to estimate
their future production costs and revenues. Derivative securities provide them a valuable set of
tools for managing this risk. Risk management, the managerial process that is used to control
such price volatility, has consequently risen to the top of financial agendas. It is here that
derivative instruments are of utmost utility.
As instruments of risk management, these generally do not influence the fluctuations in the
underlying asset prices. However, by locking-in asset prices, derivative products minimize the
impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse
investors.

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