Derivatives in the equity market are financial instruments whose value is derived from an underlying asset, such as stocks. These instruments include futures and options, which allow investors to speculate on the future price movements of the underlying asset.
Futures contracts obligate the buy...
A derivative instrument means a forward, a future, an option or a swap contract of
predetermined fixed duration link for the purpose of contract fulfilment to the value of
specified assets.
In the case of equity stock market that asset would be equity stocks
Derivative Instruments commonly found in Equity Stock Markets
1. Stock Futures
2. Index Futures
3. Equity Stock Options
Participants in Equity Stock Markets
Hedgers :Wish to hedge their risks i.e. to protect themselves against potential adverse
movement in stock prices
Speculators: Try to gain from the swings and volatilities in equity stock prices over time
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 4
Systematic Risk impact the price of equity stocks of all firms that are listed in that market
to varying degree.
Contributors to systematic risk include macroeconomic factors pertaining to the country
where the equity stocks are traded like
Inflation
Interest rate
fiscal deficit
Political environment / stability
GDP growth, etc.
Unsystematic Risk (Idiyosyncratic Risk)
The unsystematic risk (idiyosyncratic risk) associated with every equity stock, driven by firm-
specific factors such as
Decline in revenues and/or profits of the firm
Increased competition
Product obsolescence
Higher financing costs
Management failures, etc.
Unsystematic risk can be minimized or diversified away by creating a portfolio of equity
stocks.
Hedging using futures
Equity Stock Futures and Index Futures are meant to minimize the probability of losses even
if it means reduction in potential profits for the investor.
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