Economics Derivatives Questions
The key features of equity derivatives are as follows:
1. Underlying Asset: Equity derivatives are financial instruments whose value is derived from the price movements of underlying equities or stocks.
2. Risk Management: Equity derivatives are commonly used for risk management purposes, allowing investors to hedge against potential losses or fluctuations in the equity market.
3. Leverage: Equity derivatives provide investors with the opportunity to gain exposure to a larger position in the underlying equity with a smaller initial investment, thereby offering leverage.
4. Variety of Instruments: Equity derivatives encompass a wide range of instruments, including options, futures, swaps, and forwards, providing investors with various strategies and choices to suit their investment objectives.
5. Price Volatility: Equity derivatives are influenced by the price volatility of the underlying equities, making them attractive for speculators and traders seeking profit from price movements.
6. Customization: Equity derivatives can be customized to meet specific investor requirements, such as the desired expiration date, strike price, or contract size, allowing for tailored risk management or investment strategies.
7. Market Liquidity: Equity derivatives are traded on organized exchanges or over-the-counter markets, providing liquidity and ease of trading for investors.
8. Price Discovery: Equity derivatives contribute to price discovery in the underlying equity market, as the derivative prices reflect market expectations and sentiments.
9. Counterparty Risk: Equity derivatives involve counterparty risk, as the performance of the derivative contract is dependent on the financial stability and ability of the counterparty to fulfill their obligations.
10. Regulatory Oversight: Equity derivatives are subject to regulatory oversight to ensure fair and transparent trading practices, risk management, and investor protection.