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    Derivatives are financial instruments whose value is based on an underlying asset. Commodity derivatives are based on physical commodities while financial derivatives are based on stocks, bonds, currencies or market indexes. Hedging aims to reduce risk, speculation aims to profit from price changes, and arbitrage aims to profit from price differences. Spot markets involve immediate delivery while forward markets set delivery and payment at a future date. Derivatives are used for hedging, speculation, and arbitrage and help facilitate trade and manage risk in international markets. The forward exchange market involves contracts for currency exchange at a future date where the forward rate is determined by interest rates. It differs from futures markets which are standardized exchange-traded contracts.

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    Derivatives are financial instruments whose value is based on an underlying asset. Commodity derivatives are based on physical commodities while financial derivatives are based on stocks, bonds, currencies or market indexes. Hedging aims to reduce risk, speculation aims to profit from price changes, and arbitrage aims to profit from price differences. Spot markets involve immediate delivery while forward markets set delivery and payment at a future date. Derivatives are used for hedging, speculation, and arbitrage and help facilitate trade and manage risk in international markets. The forward exchange market involves contracts for currency exchange at a future date where the forward rate is determined by interest rates. It differs from futures markets which are standardized exchange-traded contracts.

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    Derivatives are financial instruments whose value is based on an underlying asset. Commodity derivatives are based on physical commodities while financial derivatives are based on stocks, bonds, currencies or market indexes. Hedging aims to reduce risk, speculation aims to profit from price changes, and arbitrage aims to profit from price differences. Spot markets involve immediate delivery while forward markets set delivery and payment at a future date. Derivatives are used for hedging, speculation, and arbitrage and help facilitate trade and manage risk in international markets. The forward exchange market involves contracts for currency exchange at a future date where the forward rate is determined by interest rates. It differs from futures markets which are standardized exchange-traded contracts.

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    Derivatives are financial instruments whose value is based on an underlying asset. Commodity derivatives are based on physical commodities while financial derivatives are based on stocks, bonds, currencies or market indexes. Hedging aims to reduce risk, speculation aims to profit from price changes, and arbitrage aims to profit from price differences. Spot markets involve immediate delivery while forward markets set delivery and payment at a future date. Derivatives are used for hedging, speculation, and arbitrage and help facilitate trade and manage risk in international markets. The forward exchange market involves contracts for currency exchange at a future date where the forward rate is determined by interest rates. It differs from futures markets which are standardized exchange-traded contracts.

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    Questions for Discussion on Note 7

    Q. 1 Define “derivatives”. Discuss with examples the concept of Commodity and Financial Derivaties.
    Q.2 Discuss with suitable examples the basic concept of Hedging, Speculation and Arbitrage. What are
    the similarities and differences between them?
    Q.3 What do you understand by the term Spot and Forward market.? Discuss with examples their
    effectiveness in the International trade.
    Q.4 Discuss with examples the uses and functions of derivatives .

    Q.5 What do you mean by forward exchange market? How is forward rate determined ? How is
    forward exchange Market different from Future markets?
    Q.6 Distinguish between the following with suitable examples:

    a) a call option and a put option

    b) futures and forward contracts

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