CAPSTONE PROJECT-10

PARTICIPANTS IN
DERIVATIVE MARKET
REPORT
1.Derivatives are financial contracts whose
value depends on an asset or a group of assets.
2.There are four types of derivaties like options ,
futures , forwards , swaps.
3.Participants in derivative markets depends on
how they trade.
4.Being some participants has high risk
associated with it.
INTRODUCTION
What are derivatives
> Derivatives are financial contracts whose
value is dependent on an underlying asset or
group of assets. The commonly used assets are
stocks, bonds, currencies, commodities and
market indices.
> The value of the underlying assets keeps
changing according to market conditions. The
basic principle behind entering into derivative
contracts is to earn profits by speculating on the
value of the underlying asset in future.
TYPES OF DERIVATIVE MARKET

Derivative contracts can be classified into

following four types
1.Options
2.Futures
3.Forwards
4.Swaps
Options
Options provide the buyer of the contracts the
right, but not the obligation, to purchase or sell
the underlying asset at a predetermined price.
Based on the option type, the buyer can exercise
the option on the maturity date (European
options) or on any date before the maturity
FUTURES
Futures contracts are standardized contracts that
allow the holder of the contract to buy or sell the
respective underlying asset at an agreed price on
a specific date. The parties involved in a futures
contract not only possess the right but also are
under the obligation, to carry out the contract as
agreed.
FORWARDS
Forwards contracts are similar to futures
contracts in the sense that the holder of the
contract possesses not only the right but is also
under the obligation to carry out the contract as
agreed. However, forwards contracts are over-
the-counter products, which means they are not
regulated and are not bound by specific trading
rules and regulations.
Swaps
Swaps are derivative contracts that allow the
exchange of cash flows between two parties.
The swaps usually involve the exchange of a
fixed cash flow for a floating cash flow. The
most popular types of swaps are interest rate
swaps, commodity swaps, and currency swaps.
Participants in the Derivatives Market
1. Hedgers
2. Speculators
3. Arbitrageurs
4. Margin traders
1. Hedgers
Hedging is when a person invests in
financial markets to reduce the risk of price
volatility in exchange markets, i.e.,
eliminate the risk of future price
 movements. Derivatives are the most
popular instruments in the sphere of
hedging. It is because derivatives are
effective in offsetting risk with their
respective underlying assets.

2. Speculators
Speculation is the most common market
activity that participants of a financial
market take part in. It is a risky activity that
investors engage in. It involves the
purchase of any financial instrument or an
asset that an investor speculates to become
significantly valuable in the future.
Speculation is driven by the motive of
potentially earning lucrative profits in the
future.

3. Arbitrageurs
Arbitrage is a very common profit-making
 activity in financial markets that comes into
effect by taking advantage of or profiting
from the price volatility of the market.
Arbitrageurs make a profit from the price
difference arising in an investment of a
financial instrument such as bonds, stocks,
derivatives, etc.

4. Margin traders
In the finance industry, margin is the
collateral deposited by an investor investing
in a financial instrument to the counterparty
to cover the credit risk associated with the
investment.

Criticisms of the Derivatives Market

1. Risk
The derivatives market is often criticized
and looked down on, owing to the high risk
associated with trading in financial
instruments.
2. Sensitivity and volatility of the market
Many investors and traders avoid the
derivatives market because of its high
volatility. Most financial instruments are
very sensitive to small changes such as a
change in the expiration period, interest
rates, etc., which makes the market highly
volatile in nature.
3. Complexity
Owing to the high-risk nature and
sensitivity of the derivatives market, it is
often a very complex subject matter.
Because derivatives trading is so complex
to understand, it is most often avoided by
the general public, and they often employ
brokers and trading agents in order to invest
in financial instruments.
4. Legalized gambling
Owing to the nature of trading in financial
markets, derivatives are often criticized for
being a form of legalized gambling, as it is
very similar to the nature of gambling
activities.
CONCLUSION
Derivative securities markets play an important
role by allowing investors who do not want the
risks associated with holding an asset to transfer
it to those who do. However, because they are
markets for risk as opposed to physical assets,
derivatives markets can be very dangerous
places for unsophisticated investors. People who
reduce their risk by entering a derivative market
are called hedgers, and those who increase their
risk are called speculators.