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Derivatives Market
Definition of Derivatives Market
The derivatives market is a place where financial contracts like futures, options, forwards, and swaps are traded. It is a complex market that is a subset of the stock market, commodity market, currency market, and others depending on the underlying asset that’s a part of the derivative contract.
Related Terms
EBITDA
EBITDA is short for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA allows investors to understand cash flow from all operations while excluding certain non-cash expenses related to interest, depreciation, amortization, and taxes.
That’s why investors use EBITDA as a valuation technique to determine the profitability of a company. Interestingly, EBITDA is a variation of operating income which is known as EBIT.
While there are many ways to calculate EBITDA, the most common methods include:
1) EBITDA = Net Income + Taxes + Interest + Depreciation + Amortization 2) EBITDA = Operating Income + Depreciation & Amortization
That’s why investors use EBITDA as a valuation technique to determine the profitability of a company. Interestingly, EBITDA is a variation of operating income which is known as EBIT.
While there are many ways to calculate EBITDA, the most common methods include:
1) EBITDA = Net Income + Taxes + Interest + Depreciation + Amortization 2) EBITDA = Operating Income + Depreciation & Amortization
Margin Funding
Margin funding is a feature offered by brokers that allows users to borrow funds from the broker to increase purchasing power for trading or investing in financial markets. Margin funding is effectively a loan and as a result, there’s collateral to be pledged in the form of shares either already owned to about to be bought. Thus, margin funding amplifies profit and loss.
High Volatility Stocks
High volatility stocks are shares that fluctuate based on market conditions, typically more than others. The volatility could be a result of inherent fundamentals or other factors like the industry or domain. Identifying high volatility stocks is possible through indicators like Average True Range and Bollinger Bands.
Hedging
Hedging is a risk management technique where potential loss is offset by securing a safer, more stable trade. For example, buying stock (risky) and offsetting the risk with commodity (stable) is a common hedging practice in the securities market.
In the derivatives market, hedging is followed by merchants and businesses who want to protect against adverse price movements in commodities or currencies. They do so by entering into a futures or options contract.
In the derivatives market, hedging is followed by merchants and businesses who want to protect against adverse price movements in commodities or currencies. They do so by entering into a futures or options contract.
Alpha
An Alpha indicates the measure by which a stock or portfolio has managed to outperform a benchmark like an index of shares.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
Average True Range Atr
The Average True Range (ATR) is a technical indicator used to measure market volatility, typically using the average of true ranges from 14 periods that can be daily, weekly, monthly, or even intraday values.
The formula for ATR is:
ATR = Previous ATR (n - 1) + True Rangen / n
n= number of periods
True Range = The greater/highest of these:
- High - low (Day 1)
- Absolute value of (Day 1’s high - Day 0’s close)
- Absolute value of (Day 1’s low - Day 0’s close)
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