Uses of Derivatives
- Created by: Amywelsh1
- Created on: 24-01-24 15:23
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- Use of Derivatives
- Hedging
- Reduce the impact of adverse price movements
- Selling sufficient number of futures
- Buying put options
- Anticipating Future Cash Flows
- Futures used to fix prices when portfolio manager expects to receive large inflow of cash in asset
- Offsets the risk that prices will have risen by the time cash flow is received
- Asset Allocation Changes
- changes of asset allocations of a fund
- Take advantage of short-term directional market movements or change in strategy
- Less expensive and more swift using derivatives and futures than by buying and selling securities
- Arbitrage
- Deriving risk free profit - simultaneous buy and sell the same asset on 2 different markets
- If price of derivative and the underlying asset are mismatched - portfolio manager could receive profit
- Hedging
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