Are derivatives the right investment instrument for you? Let’s see!
Derivative is a payment exchange agreement or bilateral contract whose value is derived from derivative products.
Derivative profit opportunities will depend on the performance of the assets in the spot market.
Now uniquely, it turns out that derivatives can also be used as an investment instrument. How could that be? Don’t worry, Actively Share will wrap it up especially for you this time. Check this out!
What are Derivatives?
Derivatives are contract agreements entered into by two or more parties with the aim of selling or buying assets or commodities. Later, the contract will serve as the object of trade. The price of this contract value must be agreed by both parties. It is also influenced by the price value of the parent asset or commodity.
Derivatives are investment instruments consisting of several financial products and have been supervised by the the authority. These various financial products include stocks, currencies, bonds, interest rates, stock indexes, bond indexes, and so on.
On the other hand, if the derivative product is a commodity, the supervision is carried out by the Commodity Futures Trading Supervisory Agency.
So simply, the way derivatives work is an investment product based on a trade agreement contract. Derivatives are also considered as investments that have high risk because they take advantage of forecasts of future prices with large potential returns.
Derivative Benefits
Derivative transactions are investment products that are basically created to hedge the value or price of a commodity in the future. Looking back at history and its origins, the emergence of derivatives was to protect the price of wheat in Chicago at that time.
For example, in Indonesia itself, in 2017 Bank Indonesia had assisted SOEs to take advantage of derivative instruments to overcome the fall in the rupiah exchange rate. In addition, derivative instruments can also minimize losses and the company’s financial risks.
Types and Examples of Derivatives
The types of derivative instruments can be divided into several forms. In general, derivative instruments are divided into 2 parts, namely derivatives sold on the secondary market and derivatives outside the stock exchange. Here are some types and examples of derivatives.
- Delivery
Contract A delivery contract is an agreement between two or more parties to deliver or purchase assets or commodities at an agreed price, amount and delivery date. The delivery contract can be said to be completed if the commodity or foreign currency is delivered physically or on a net basis. - Futures Contracts Futures
contracts in derivatives are agreements between two or more parties to deliver or purchase assets or commodities at an agreed price, amount and delivery date. The difference with delivery contracts is that futures contracts are traded regularly on the futures exchange, which is where futures contract transactions are carried out. - Option
contracts Option contracts are one of the most widely used derivative instruments to hedge against risk or value (hedging). There are 2 types of option contracts, namely put options and call options.A put option or put option is to give the owner a contractual right to sell a certain asset. While a call option or call option is to give the owner a contract right to buy a certain asset.The holder of the option has the right, but they are not obligated to make the transaction at the price specified in the option contract.
- Swap
The last type of derivative is a swap, which is a contract to exchange cash flows for a certain period of time and is carried out continuously. Examples of swap transactions that are commonly carried out are interest rate swaps .Interest rate swap is associated with any value or price that tends to fluctuate. The function of the swap is usually to protect the company from fluctuations in interest rates. Swaps can generally be negotiated directly by the two or more parties to the contract.
Derivative Risk
As you know that derivatives are investment products in the form of trading contracts. This means that the risk of this investment instrument is also high, even though the benefits are large.
In reality, the process of implementing derivative instruments is very complex and detailed. Although it aims to protect the rupiah exchange rate, companies that use derivative products do not mean they can be free from the existing risks.
As explained above, derivatives will be more inclined to use forecasts of existing prices in the future. Therefore, it is natural that this investment instrument carries a high risk, it can even be said to exceed the risk of the stock.
That’s a review about the meaning of derivatives and complete examples to the benefits and risks. Who would have thought, it turns out that even a contract agreement can be a promising opportunity. So from the explanation above, is your investment risk profile in line with derivatives? So that you don’t choose the wrong investment instrument, let’s learn about it in other ActivelyShare.Com articles!
