Most likely, you have heard of the term derivatives at least once. Many articles across the media criticize or appreciate derivatives. The talk is originated from the shockingly large numbers behind such contracts. It is often said that the total amount of derivatives contracts globally is significant than the total amount of money available in the world. To understand this, our professional at GCS Malta discuss the matter in more detail in our latest article.
Future Date.
A derivative contract is a contract that specifies that some future commodity may be exchanged at a later date at a price fixed today. Thus, the derivative contract is a license to purchase items below market price and book an immediate gain. The value is derived from the fluctuation in the price of an underlying asset. Modern-day derivatives allow one to purchase a derivative on anything.
Obligation vs option.
There are two types of contracts: symmetrical and asymmetrical. Symmetrical contracts bind both the buyer and the seller to the agreement; they obligate both to go through the trade. Whilst asymmetrical contracts give the right to one party but not the obligation to follow through with the contract. The option must only be held by one party and cannot be held by both.
Time restriction.
After a specific date, the derivatives become invalid as they reach the expiration date. So for the derivative contract to be valid, they need to be utilized within the speculated timeframe.
Settlement.
Derivative contracts can be settled in cash or kind. The executing individual has the right to ask for the underlying commodity or money; however, derivative contracts are usually settled in cash.
High leverage.
Large leverage ratios characterize derivative contracts at ratios of 25 to 1 or 33 to 1. A contract cannot be called a derivative contract because it is high leverage; however, it is the norm.
Why GCS Malta?
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