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Derivatives (Finance) Simplified

>> July 20, 2010

As a finance manager, you want to know simple meaning of derivatives. I think, example is best tool to simplified this murky finance term.

Suppose you go to metals market ( suppose it is derivative market)  for buying iron for your building which will be built in beginning of next 3rd month. But in the way, you opened your tremendous mind and thought , " Why am I buying today? For keeping this, I have to use a store. But if I do not buy price of iron may be increased." So, you go to metals shop and contracted with trader that iron's delivery will be end of next 2nd month. You also gave some advance money to him for assuring that you will buy all the irons. So, this contract will be derivative in simple words.

In financial sector, you can buy shares, bonds, debentures and mutual funds through derivative technique. Suppose, if you take any financial instrument for buying shares in future dates. Your given advance money will lock the price and you will have right to get shares with this price in future. Vendor can not demand more money than what he fixed and taken in past. Derivative tool is most benefited if there is risk of flactuation in market.

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Anonymous,  July 2, 2011 at 11:16 AM  

thanku.. thats a good explanation....

Clementia D'souza July 18, 2012 at 12:33 AM  

a very good explanation thanks alot

Anonymous,  January 16, 2013 at 11:34 AM  

very helpful. Thank you so much. Please keep do this good work.

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