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Derivatives Trading
Definition of Derivatives Trading
Derivatives trading means buying and selling derivatives contracts like futures, options, swaps, and forwards either on an exchange or over the counter.
Trading derivatives means trading contracts that derive their value from an underlying asset like stocks, commodities, currencies, indexes, interest rates, and more.
The buyer of the contract can decide to take delivery to the underlying asset or offset it with an opposite contract.
Trading derivatives means trading contracts that derive their value from an underlying asset like stocks, commodities, currencies, indexes, interest rates, and more.
The buyer of the contract can decide to take delivery to the underlying asset or offset it with an opposite contract.
Related Terms
Exponential Moving Average
Exponential Moving Average (EMA) is a technical indicator used to follow price trends over a specific period of time. EMA assigns more weight to recent prices than older prices. The formula to calculate EMA is:
Exponential Moving Average = (K x (CP - PP)) + PP
C: Current Price of stock, currency, commodity, etc. P: The EMA of preceding periods K: Exponential smoothing constant
A Simple Moving Average (SMA) is used to calculate the value of the first period. Furthermore, the EMA can be used to identify support and resistance areas. However, it may not be optimal for identifying precise entry and exit points.
Exponential Moving Average = (K x (CP - PP)) + PP
C: Current Price of stock, currency, commodity, etc. P: The EMA of preceding periods K: Exponential smoothing constant
A Simple Moving Average (SMA) is used to calculate the value of the first period. Furthermore, the EMA can be used to identify support and resistance areas. However, it may not be optimal for identifying precise entry and exit points.
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.
Capital Gains
A capital gain is a profit an investor or trader earns by selling shares, commodities, futures, options, currencies, and other assets. More literally, a profit is a gain on the capital that’s invested - hence the term capital gains.
Say someone buys a share for Rs. 1000 and sells it for Rs. 1100. The capital gains will be Rs. 100 in this case. The taxation of capital gains varies based on the asset type and the duration after which it was sold.
Say someone buys a share for Rs. 1000 and sells it for Rs. 1100. The capital gains will be Rs. 100 in this case. The taxation of capital gains varies based on the asset type and the duration after which it was sold.
Capital Gain Or Loss
A capital gain is a profit that an investor or trader earns by selling an asset while a capital loss is the money a trader or investor loses after selling an asset. Capital gains are taxed while capital losses can be used to offset gains.
Cash and Cash Equivalents
Cash and cash equivalents are short-term assets or holdings which fall under the current assets of a business. Cash and cash equivalents have very high liquidity. When you take the term literally, you have two components:
- Cash: money like cash holdings in a bank account, petty cash, and others
- Cash equivalents: assets or investments like T-bills, commercial paper, and others that have a short maturity which can easily be converted into cash
Differential Voting Rights
Differential Voting Rights or DVRs are special types of shares that carry more or less voting rights, depending on the issuing company. For example, a DVR share that carries less than usual voting rights may generate relatively high dividends.
A publicly traded company that wants to issue DVR shares must go through a postal ballot. There are other caveats as well. But broadly speaking, a company must have a healthy finanical track record if they want to issue DVR shares.
A publicly traded company that wants to issue DVR shares must go through a postal ballot. There are other caveats as well. But broadly speaking, a company must have a healthy finanical track record if they want to issue DVR shares.
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