{"id":266511,"date":"2024-10-21T14:14:04","date_gmt":"2024-10-21T14:14:04","guid":{"rendered":"https:\/\/imarticus.org\/blog\/?p=266511"},"modified":"2024-10-21T14:14:04","modified_gmt":"2024-10-21T14:14:04","slug":"derivatives-trading","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/derivatives-trading\/","title":{"rendered":"Navigating Derivatives Trading: Strategies for Managing Risk and Maximising Returns"},"content":{"rendered":"
Trading of derivatives is emerging as a powerful tool for investors, allowing them to buy and sell assets strategically for the future. A derivative is a financial contract that derives value for an underlying asset or benchmark decided by two or more parties.\u00a0<\/span><\/p>\n Derivates have predetermined and fixed expiry dates, offering a compelling alternative to traditional asset acquisition. <\/span>Derivatives trading<\/span> can significantly increase gains, making it a popular choice over directly trading underlying assets.\u00a0<\/span><\/p>\n Investors can control substantial quantities of assets with minimal upfront capital in this form of trading. Let us understand <\/span>what derivatives trading is<\/span> and how you can benefit from it.\u00a0<\/span><\/p>\n A derivative is a financial contract between two or more parties that derives its value from the underlying asset. These assets include indices, stocks, currencies, commodities, exchange rates, or interest rates.\u00a0<\/span><\/p>\n Investors can profit by speculating on the future value of the underlying asset or its movement\u2014up or down\u2014without buying the asset itself. This is why a derivative is called a \u2018derivative\u2019 since its value is derived from the underlying asset.\u00a0<\/span><\/p>\n In this form of trading, investors buy or sell a derivative contract for speculation. Since a derivative contract is \u2018deriving\u2019 its value from an underlying market, you can trade on the market's price movements.\u00a0<\/span><\/p>\n Derivatives trading<\/span> is a leveraged form of trading in which you can buy a large number of underlying assets by paying a relatively smaller amount.\u00a0<\/span><\/p>\n Now that you have a brief idea of what a derivative is, you might wonder how it is traded. Derivatives can be traded in two ways - over the counter or on exchange.\u00a0<\/span><\/b><\/p>\n Learn more about derivate trading strategies by enrolling in the <\/span>IIM investment banking course<\/span><\/a> by Imarticus.\u00a0<\/span><\/p>\n Here are some of the most common derivative contracts used in <\/span>derivatives trading<\/span>:\u00a0<\/span><\/b><\/p>\n Features:\u00a0<\/b><\/p>\n Futures:<\/span> <\/b>These are standardised agreements between the buyer and seller to purchase or sell an asset at a predetermined price on a date in the future.\u00a0<\/span><\/p>\n Features:\u00a0<\/b><\/p>\n Swaps: <\/b><\/span>These contracts adapt according to parties' needs by exchanging cash based on various financial tools.\u00a0<\/span><\/p>\n Features:\u00a0<\/b><\/p>\n Forwards<\/b><\/span> are customised transactions between two parties, curated according to their specific needs.\u00a0<\/span><\/p>\n Features:\u00a0<\/b><\/p>\n As a derivatives trader, you might be aware of the potential risks but should also know how to navigate them. Here are some <\/span>risk management strategies<\/span> that will make the process easier for you:\u00a0<\/span><\/p>\n If you have ever invested in the stock market, you know the importance of having a diverse portfolio. Investing in various assets can help achieve higher returns with minimal risk. To mitigate potential risks, you can invest in different asset classes like equities, real estate, fixed income, and commodities.\u00a0<\/span><\/p>\n In this process, investors take an offsetting position in a related asset to reduce the price risk of an existing asset position. This reduces volatility risk in <\/span>derivatives trading<\/span>. Hedging can be done in the following ways:\u00a0<\/span><\/p>\n You can set a limit to reduce losses. Investors can save their portfolios from major value declines by selling assets when their prices fall below a certain point. You can seize a position by allocating a specific capital amount to a particular investment based on market conditions and risk tolerance.\u00a0<\/span><\/p>\n The popularity of <\/span>derivatives trading<\/span> is increasing every day due to the high returns it offers. But it does come with its pitfalls. Building an investment plan can help you avoid risks and make more profit.\u00a0<\/span><\/p>\n If you want to build a career in investment banking, check out the <\/span>Executive Programme in Investment Banking and Capital Markets<\/a><\/span> by Imarticus in association with IIM Calcutta. Taught by industry experts, the programme teaches capital management and advanced skills that are useful in real-world scenarios.\u00a0<\/span><\/p>\n What are some different risks in <\/b>derivatives trading<\/b>?\u00a0<\/b><\/p>\n Some of the risks associated with trading in derivatives are market risk - the risk of a decline in the value of an underlying asset, credit risk - the risk of loss when the counterparty defaults on the obligations and liquidity risk - the risk when derivates are closed at a price before maturity.\u00a0<\/span><\/p>\n Who are margin traders?\u00a0<\/b><\/p>\n A margin in derivatives trading is the starting amount you need to pay the broker. It is a part of the entire value of the investor\u2019s position. This payment feature helps margin traders purchase more stocks than they can afford.\u00a0<\/span><\/p>\n What are some cons of trading derivatives?\u00a0<\/b><\/p>\n Some common disadvantages of derivatives trading are the change in the amount of time until expiration, change in interest rates, or any costs associated with holding the underlying asset. In over-the-counter derivates, counterparty risks can be challenging to predict.\u00a0<\/span><\/p>\n What is a regulatory risk?<\/b><\/p>\n Potential changes in rules and regulations can impact trading activities and financial outcomes. In extreme conditions, these conditions can even destroy the company\u2019s business model. This is why creating a trading strategy plan is crucial.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" Trading of derivatives is emerging as a powerful tool for investors, allowing them to buy and sell assets strategically for...<\/p>\n","protected":false},"author":1,"featured_media":266512,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[22],"tags":[4886],"pages":[],"coe":[],"class_list":{"0":"post-266511","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-finance","8":"tag-derivatives-trading"},"acf":[],"yoast_head":"\nWhat is a derivative?\u00a0<\/span><\/h2>\n
What is derivatives trading<\/span>?\u00a0<\/span><\/h2>\n
How are derivatives traded?\u00a0<\/span><\/h2>\n
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Types of derivative contracts\u00a0<\/span><\/h2>\n
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Risk management strategies<\/span> in derivatives trading\u00a0<\/span><\/h2>\n
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Diversification\u00a0<\/strong><\/span><\/h3>\n<\/li>\n<\/ul>\n
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Hedging\u00a0<\/strong><\/span><\/h3>\n<\/li>\n<\/ul>\n
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Setting limits\u00a0<\/strong><\/span><\/h3>\n<\/li>\n<\/ul>\n
Summing up\u00a0<\/span><\/h3>\n
Frequently Asked Questions<\/span><\/h3>\n