Derivative Market Equity

The derivative market equity includes the financial instruments such as futures, options and swaps. The equity derivatives are stocks or stock indices whose prices depend on the prices of the underlying equity instrument.

The equity derivatives are traded in the futures and options exchanges or in the over the counter markets.

The most common forms of the derivative market equity are the futures and the options market.

The options and futures market

Options are contracts that give the buyer or seller the right and not the obligation to buy or sell the underlying asset at a fixed price at a future date. the call option gives the right to buy while the put option gives the right to sell.The buyer of the call option can gain by an increase in the price of the underlying asset without buying the underlying asset. Conversely the put option holder benefits from the fall in the price level of the underlying asset.

Contrast to the option market the person who goes long or short in the futures market is bound to buy or sell the contract at the specified price and date. Hence the futures contracts are much more standardized in comparison to the options and hence they are traded in accredited exchanges.

Warrants

Unlike the options and the futures which are exchange traded financial instruments, the warrants are equity derivatives that are traded over the counter. Warrants are used sometimes to increase the yield of bonds. Warrants are similar to the equity options but are an exception since they are traded by private parties.

Convertible Bonds

Convertible bonds are a combination of bonds and equity. The convertible bonds provide asset protection, high equity returns and they are of less volatile nature.

The investors in the equity derivative can hedge their risk. The equity derivatives are also used as a speculative instrument.

The derivative market equity traders use the data on stock and their derivatives. They also need, in addition, the factors that may affect the equity prices. To analyze the data the equity market traders need appropriate statistical tools.

For further information on derivative market equity, the following websites need to be looked at equityderivatives.com, reuters.com, asx.com, amazon.com etc.