What is a Derivative?
The basic principle behind entering derivative contracts is to earn profits by speculating on the value of the underlying asset in the future, getting access to additional assets or markets, insuring against price movements (hedging), increasing exposure to price movements for speculation. These contracts can be used to trade any number of assets that carry their own risks.
Some of the more common derivatives include: –
- Forwards & Futures
- Options
- Swaps
- Forwards & Futures: –
- Both forwards and futures are essentially the same in their nature.
- These are financial contracts that obligate two parties, usually the buyers, to purchase an asset at a pre-agreed price or specified price on a certain date.
- Forwards are private, flexible contracts where the parties can customize the underlying commodity, the quantity of the commodity, and the date of the transaction traded over the counter. The parties involved in forwards are obliged to fulfill the contract at maturity.
- Futures are standardized contracts traded on the exchanges, where prices are settled on a daily basis until the end of the contract. The parties involved in futures are not obliged to final fulfillment/realization as the same can be bought or sold anytime.
- Options: –
- These are contracts where the buyer of the contract has the right & flexibility to purchase or sell an underlying asset at a specified price or date without any obligation over an exchange.
- Options can possibly make relatively larger profits if the price of the asset goes up as payment of the full price for the security is not required. Vice-versa, it can restrict losses if the price of the security goes down, which is known as hedging.
- Swaps: –
- These are contracts through which two parties exchange the cash flows as well as liabilities from two different financial instruments within a certain time.
- In other words, Swaps are contracts in which one party exchanges or swaps the value or cash flow of one asset for another. Common types of swaps include interest rate, foreign exchange rate, equity price, or commodity price. Swaps are traded over the counter like Forwards.
Variations of derivatives – CDO (Collateralized Debt Obligation)
What is CDO (Collateralized Debt Obligation)?
- CDO’s (Collateralized Debt Obligation) are financial investment products or tools that banks use to represent several individual loans bundled together into products and sold to investors as Tranche (divided unit of loans) to be further sold on the secondary market.
- Typical CDO products consist of auto loans, credit card debt, mortgages, or corporate debt. CDO’s (Collateralized Debt Obligation) product price depends on the price of some other asset, hence they are called collateralized. In other words, the promised repayments of the loans are the collateral, which gives the CDOs their value.
Derivatives is an interesting concept and usually attracts people who are more inclined towards earning through the secondary source. Just like the demand and craze for derivatives among investors, there is a lot of demand for candidates who can work in the field to enable such trading and management. If you wish to pursue a career in the Investment and Investment management domain, we will advise you to pursue a certification course in Finance and Investment. These courses are mostly short term courses and will help you kick start a career in a particular domain by teaching you the skills required in that domain or industry. But one thing to be noted here is that these certification courses are very specific to the area you want to gain knowledge in, and that certification course might not be very helpful if you wish to switch to another domain in the same industry in the future.
If you want to secure your position in an industry, we recommend pursuing a professional course in the accounting or finance domain. Professional courses include mid term courses that cover the entire finance or accounting domain, making you employable in almost any segment of these domains. Derivatives are majorly covered in finance courses, with each course focusing majorly on some topics and superficially on the other topics. Pick a finance course that covers derivatives intensively if you wish to build a career majorly in the derivatives segment.
One course that could be a brilliant choice for candidates wanting to build a career in the derivatives segment is the CFA course. CFA course is offered by an institute based in the United States known as the CFA Institute. The CFA course covers all the concepts of finance and investment with an intense focus on financial strategies and analysis. If that is what interests you, then you can walk in at the EduPristine center for a brief counselling session about the CFA course. Our career counsellors will help you understand what you will learn through the CFA training duration, what are the job opportunities available after the CFA course, how you can start a career in numerous segments in the finance industry, and details like CFA course eligibility, CFA course fees, CFA course duration, and CFA course scope.
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