√ Definition of Derivatives, Actors, Benefits, and Types
Definition of Derivatives, Actors, Benefits, and Types - On this occasion About Knowledge will discuss the Definition of Derivatives. Which in this discussion explains the meaning of derivatives, reasons, actors, benefits and types briefly and clearly. To make it easier to understand, see the following article on the definition of derivatives.
Definition of Derivatives, Actors, Benefits, and Types
If you often struggle in the financial sector, of course you often hear the term "Derivative", but for those who have just heard it, it will definitely be foreign. Therefore, in this discussion, we explain derivatives in the financial sector.
Definition of Derivatives
Definition of Derivatives are contracts that are bilateral in nature or an agreement in the exchange of payments with an impairment in value originating from derivative products. In this case derivatives can be formed due to derivatives from other securities instruments which are commonly referred to as underlying.
In our country there are also several kinds of derivative instruments, including warrants, bukri rights and current contracts. In derivatives where if the instrument is not used carefully it will be very risky.
Definition of Derivative Transactions
A derivative transaction is an agreement between two parties known as counterparties (related parties). Basically a derivative transaction is a bilateral contract or a payment exchange agreement whose value depends on the value of assets, indexes and references.
For now, in derivetive transactions, there is an underlying reference, namely:
Currently, this derivative transaction consists of a number of underlying references, namely
- Interest Rate
- Exchange Rate (Currency)
- Commodity
- Equity
- Index (Index)
In general, derivative transactions are OTC (Over The Counter) products, namely contracts that can be negotiated privately and offered directly to end users ie as opposed to standardized contracts (9futures) and traded on the stock exchange.
When looking at dealers and end users, the function of a derivative transaction is to hedge against certain types of risk.
The reasons for using derivatives include:
- The needs are always changing and vary greatly from a group of users
- Take advantage of existing inefficiencies between markets.
- Tools to manage risk
- Hedging current and future risks.
- Take market risk positions
- Search for greater results.
- Lower funding costs.
Derivative Transaction Actors
In this case there are 2 actors in derivative transactions, namely:
End Users
Based on the G-30 Report in 1993, most of the end users of derivatives, namely around 80%, are companies, government agencies and the public sector. The reasons that encourage these end users to use derivative instruments are:
- To be able to reflect market views through the positions taken
- As a means of hedging
- To obtain a lower cost of funds.
- Heightening profits
- To be able to diversify sources of funds.
Brokers (Dealers)
Brokers consist of several financial institutions, and the functions of dealers are:
- Providing the ability to enhance market liquidity and price efficiency.
- Maintain liquidity and continuous availability of transactions.
- Fulfill end user requests promptly.
Derivative Benefits
The following are some of the benefits of Derivatives, including:
- As an instrument to transfer risk to other parties
For example, a rice farmer can sell futures contracts for yields to a speculator, even though it is not yet time to harvest. The farmer will get risk protection from the ups and downs of rice prices.
Meanwhile, the speculator is ready to accept this risk in the hope of getting a profit if the selling price of rice has increased and vice versa if you experience a loss when the selling price of rice decrease.
- As an action to take advantage
As an action to be able to take advantage of a difference in the value of a reference asset and the value of another asset.
An example is taking advantage of the difference in the price of the LQ-45 index (ILQ-45) on the Lampung Stock Exchange and also the ILQ-45 price on the Medan Stock Exchange (future market).
Types of Derivatives
There are several types of derivatives, including:
Right proof
Proof of Right is a process of issuing new shares, in which the inherent right to be able to order new shares is first given to the old shareholders. In capital market law, proof of right can be interpreted as the right to pre-order securities at a predetermined price within a certain period.
Proof of rights issued in a limited public offering, where the new shares are offered for the first time to the old shareholders, and on the secondary market the proof of the right is also traded in the period certain.
warrant
Warrant is a right to buy common stock at a predetermined time and price. In general, warrants are sold together with other securities such as bonds. Warrants can also function as an attraction for bond buyers, therefore these warrants are usually attached as power interest in a public offering of shares or bonds, the exercise price of which is generally lower than the market price share.
Futures Contract
A stock index futures contract is an agreement or contract bilaterally or between the two parties required to do so in selling or buying production whose principal variable in the future the price has been or has been set.
Thus the explanation about Definition of Derivatives, Actors, Benefits, and Types, hopefully it can be useful and add to your insight.
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